Wednesday, 9 March 2016

Which Bank Account - Expense Funds

When we were in Australia, the bank accounts to be opened were quite straightforward. We opened transaction accounts with the major banks and the interest rate on these accounts is about 0.01% pa. To get a higher interest rate,  we opened online saver or isaver accounts and put most of our savings there and the interest rate on these accounts vary according to the cash rate set by the Reserve Bank of Australia. In the current low interest rate environment in Australia, the interest rate on these online accounts is about 2.50% pa.

In Singapore, the process gets more complex if you want to earn a higher interest rate on your savings. Generally, the interest rate on most transaction accounts here is about 0.05% pa. Fixed deposit accounts tend to be a popular way to earn higher interest but the cash gets locked up for a period of time. What I will write about in this post and the next few posts is how you can set up your bank accounts to earn higher interest without relying on fixed deposits. I will also write about the bank accounts I use as suggestions on how to structure these accounts for the 3 main purposes of cash holdings - Expense, Emergency  and Investment. Ideally, you separate these 3 groups of cash holdings in different bank accounts but it's possible to mix them in the same bank account if you are disciplined enough.
Expense Funds

Since this is your main transaction account, you need to look for a bank account that rewards a higher level of banking activity. If you work in a retail bank, you are often required to credit your salary in a bank account with the same retail bank. Hence, that might be a good place to have a look first but do remember that there are a number of options out there. For illustration, I will use my OCBC 360 account as an example. You can refer to the OCBC 360 Account website for more information and the many articles on the internet about the benefits and cons of the account. I will write this from my perspective so you can see how you can apply the same logic in choosing your expense funds bank account.

Bonus Interest
  1. For you to even consider the OCBC 360 account, you must be able to credit your monthly salary of at least S$2,000 through GIRO and that gives you the first bonus interest of 1.20% pa. If you don't have this option to credit your monthly salary into the OCBC 360 account, you are better off searching for another bank account.
  2. To get the second bonus interest of 0.50% pa, you have to pay 3 unique bills online or through GIRO. Unlike the UOB One account whereby the bill payments have to be through GIRO, you have the option to pay these 3 bills online for the OCBC 360 account. This makes it useful for the payment of credit card bills with different banks.
  3. For the third bonus interest of 0.50% pa, you have to spend at least S$500 on your OCBC credit cards monthly. We use the OCBC Robinsons and OCBC 365 credit cards to meet this requirement. Basically, if you shop at Robinsons & certain retails stores, buy groceries, dine out and do online shopping, you should be able to meet this requirement.
  4. The fourth bonus interest of 1% pa is on incremental account balances from month to month.
  5. The fifth bonus interest of 1% pa for 12 months is only relevant if you purchase a new insurance or investment product from OCBC.
Why the OCBC 360 account?

Given the link between the OCBC 360 account and your salary, credit cards and bill payments, the number of monthly transactions will require more monitoring of this account. This makes it useful as a bank account to store your expense funds. Since you will be drawing down this account to fund your expenses on travel, dining, entertainment etc, it helps to have the salary credited into this account so you won't have to keep topping it up. The account also rewards you for not spending since the fourth bonus interest of 1% pa on incremental account balances is like a benefit for any build up of your expense funds. Since any amounts above S$60,000 do not earn the bonus interest, that should be the limit for this bank account. In any case, you really shouldn't have S$60,000 of expense funds unless you have mixed in emergency funds as mentioned above. You will have to be more disciplined when it comes to tracking your spending and managing this account if you have a mix of expense and emergency funds.

Instead of mixing in emergency funds, you can allow for the build up to S$60,000 and call any excess amounts above the required level of expense funds as "Joker funds". You see, the way I view savings is any unspent cash in my bank accounts i.e. cash holdings. However, there has to be an objective for these savings and my 3 main purposes are  - Expense, Emergency and Investment. The reason why I have Joker funds is when I have met my target asset allocations for the 3 groups of cash holdings and there is excess cash. These Joker funds can essentially take on the nature of any of the 3 groups of cash holdings. Although it seldom happens, it's a good feeling when I realise I have Joker funds since that's like having a trump card up my sleeve. Most of the time, I use these Joker funds to invest into the ETF and Share portfolios. For the rest of the time, it gets used on special trips like our first ski holiday in Niseko last Christmas. That's how we keep motivating ourselves to work hard on this journey to Financial Independence!

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