Blog #3 Pay Yourself First

I assume that you are a twenty something who just started working, are eager to start saving money, but not finding this easy. Well, this blog is for you!.  First things first. Number one – you’ve got to get into the right mindset and be convinced that saving is indeed one of life’s greatest virtue. Even squirrels do it by storing seasonally abundant nuts to eat during the winter months. You will surely have your winter months (actually years) when money will be scarce relative to your needs. In short, savings is never out of fashion.

Not a disciplined saver? Frankly, it’s all in the mind. There’s a neat trick that can really help people into the saving groove. It’s called: “pay yourself first” or PYF. It works like this. Create a separate bank savings account from your salary credit account. Let’s call these accounts A and B. Instruct the bank to automatically transfer $X from your salary from account B to account A via a GIRO (General Interbank Recurring Order) arrangement. For example, if $2,000 is your salary credit, you may wish to sock away $500 each month into account A. After 12 months, you will have saved $6,000, ignoring interest, in account A. Not bad eh?  The beauty of PYF is that once you have figured out how much money to transfer, the system takes over and you are now saving in autopilot mode. This spares you the hassle of agonizing how much to save each month. Not only that, research shows that once people are on autopilot savings plans, they seldom quit. Inertia takes over and saving becomes second nature, which is another way of saying you are a habitual saver (yeah!)

Third, where to save? Now, this is where things get more exciting. Most people default all their savings into one account, usually their credit salary account. The Default Bank of Singapore (DBS) doesn’t always pay the highest interest (nor do standard accounts with the real DBS). As of now, the basic DBS savings account pays a measly 0.05% for a balance of up to…(are you ready for this) -$350,000!. It doesn’t get much better with the other banks too if you stick to plain vanilla savings accounts.

To get out of this low-rate rabbit hole, explore other savings accounts that pay much higher interest provided you meet certain conditions such as credit salary, spend using the bank’s credit cards, take up a home loan with the bank, purchase certain types of insurance products sold by the bank, invest through the bank’s online trading portal and so on. All three local banks have some version of these transactions-based savings accounts, details of which you can easily find on the internet. But do note the irritating “terms and conditions” which are usually tucked in footnotes and small print. An important condition is that your total monthly transactions must be above a specified amount to be eligible for higher interest. For example, the DBS Multiplier Savings Account requires a minimum monthly transaction of $7,500 currently. Miss it by one cent and you will get the usual measly “prevailing interest rate”instead of the advertised “up to 2.68%”.

What if you can’t meet the minimum total monthly transaction, which is very likely if you just started working. Fret  not. Some banks offer non-transactions based savings accounts that pay pretty decent interest rates. For example, CIMB, Malaysia’s second largest bank, has a FastSaver  Account that pays 1% interest on the first S$50,000 provided you maintain a minimum ac count balance of S$1,000. Account opening is online as are access to banking transactions (via internet and mobile banking). Best of all for newbies – there are no multiple transaction conditions. Still, you should note the “terms and conditions”. In particular, FastSaver pays “only” 0.6% for balances above S$50,000, which means you have to hunt for another high-yield, no multiple conditions account if you have that much spare cash. But then, if you have so much spare cash, you are probably a newbie no more, so it may be time to consider a transactions-based account 🙂



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