Saving for rainy days is an essential aspect of our lives as we never know when a disaster might strike; a family member might get seriously ill, we might lose our jobs, or we may just need, a sum of money urgently.
Hence, having a savings plan may seem like a good idea since it mandates us to set aside a certain amount to contribute towards the plan.
1. Guaranteed return from an AAA-rated sovereign bond
In AK’s post, he cautioned the reader to look out for the guaranteed return on any given savings plan. The returns given by the SSB (10 years) can be used as a basis for comparison.
A savings plan that matures in 10 years or more should be providing a higher guaranteed return than the SBB, which currently offers a 2.16% return per year on average from start to maturity.
The risk involved in purchasing the SSB is virtually at the lowest level that investors can find on the market given that it is fully backed by the Singapore government.
Hence, any other financial product that exposes the investor to higher risks than the SSB should be providing a higher guaranteed return.
Another attractive characteristic of the SSB is that there is no penalty for early redemption of bond except that the interest earned will be pro-rated.
Essentially, when you redeem your bond ahead of its maturity date, the SSB site states that “you will receive the scheduled interest together with your redemption amount”.
In the picture below you can see the amount of interest you can earn over different time duration if you purchased the December 2017 issue.
This is in contrast to the savings plan offered given that there is often a penalty involved for early withdrawal, and in the case of a fixed deposit, you might not receive any interest at all if you withdraw early.
The importance of maintaining flexibility is to ensure liquidity in times of need.
Also, as AK puts it, “15 years (referring to the saving plan offered to the reader) is a long time, and in that time, there could be a stock market crash (or two), and I would rather have more money to invest with”.
The SSB gives us the flexibility to withdraw our money within a one-month notice period while still getting our pro-rated interest, a crucial factor absent in savings plans.
3. Principal protected as compared to conventional bonds
Besides the points mentioned in AK’s post, principal protection is another attractive side of SSB. Instead of investing in saving the plan, others may opt to invest in bonds.
However, if you plan to sell your bonds before its maturity date, conventional bonds will have fluctuating prices, which has an inverse relationship with interest rates.
Hence, if you are selling your bonds during a period of high interest rates, you might find that you might not be able to recuperate your principal sum.
In contrast, the SSB guarantees that you will receive your principal investment, alongside some additional accrued interests.
Overall, AK concluded that he’d prefer SSB over savings plans, though he does concede that for people who are not as financially savvy and want to find a relatively safe place to park their spare cash, a savings plan is still a viable option.
However, for people who are a little more financially savvy and took the time to finish reading this post, it is likely that SSB will be a better option between these two.