Life is unpredictable. Having cash at your disposal is essential. However, having an excessive amount of cash can pose more risks to your wealth too. Let us delve deeper into the pitfalls of holding onto too much cash and the strategies to efficiently manage it.
Inflation’s silent creep can erode the true worth of your cash. If your savings are not matching inflation’s pace, you are losing buying power. Take Singapore’s beloved chicken rice example, in 2014, the average price was S$3.15 a plate. Mid of this year, prices went up to S$4.16 – a 32% hike in less than a decade. Your cash should work as hard as inflation does.
How Much Does a Plate of Chicken Rice in Singapore Cost (in S$)
How can we determine if we have too much or too little cash? There is no one-size-fits-all answer, but having a guiding principle can help. There are several buckets of funds in the budget, and you need to determine how much cash to allocate to each:
- Daily expenses – Keeping a regular account for daily needs is a given. You will always need some ready money for monthly bills and occasional costs.
- Emergency fund – A general rule is to have enough money safely set aside and readily accessible to cover three to six months of expenses, although this exact amount will vary depending on your financial situation. Having cash on hand to cover unexpected expenses is an important part of any savings plan. If you need S$5k to cover food, loans and basic expenses every month, then you can plan to set aside S$15-30k.
- Shorter-term goals – Another bucket is short-term goals. Whether it is a dream vacation, a wedding, a lump sum investment, setting aside funds for needs anticipated within a year or so ensures your money is effectively serving your objectives.
So, to determine if you are holding too much cash, first calculate the total amount you need based on the buckets listed above. If the cash in your bank significantly exceeds the combined amount of your listed goals, you likely have too much cash. In that case, consider investing this surplus into your investment portfolio for potential long-term returns.
After determining the appropriate amount of cash reserve, your job is not over yet. Now, focus on maximising the return on your cash. Many cash management instruments offer better returns than standard savings accounts. You can compare cash management options here.
To optimise returns on your cash, align your funding buckets with the appropriate tools based on your situation, as illustrated in Amy’s case study.
How does Amy manage her cash?
At 30, Amy is on the cusp of life’s major milestones. She is single, employed, and manages monthly expenses of S$4k. With dreams of vacationing in Australia with her parents next March and wedding bells by year-end next year, her financial plan demands strategy.
Daily Expenses: Amy earmarks S$4K for routine needs, which can be kept in the bank account.
Emergency Funds: With monthly expenses of S$4K, she puts aside an emergency fund of S$24K. A suitable place to park her emergency fund could be Syfe Cash+ Flexi, which offers liquidity in case of unexpected events. Cash+ Flexi portfolio invests in high-quality money markets and enhanced liquidity funds that earn a higher projected returns compared to bank deposits.The current projected return is 3.7% p.a.
Family Vacation in March next year: Amy is setting aside S$10K for a dream trip with her parents, and Syfe Cash+ Guaranteed could be her ideal choice. By investing in Cash+ Guaranteed, her capital and return are assured. Cash+ Guaranteed requires a 3-month lock-in period. So, if she invests in September, her funds will mature by December – perfect timing for vacation planning. The current yield stands at 3.7% p.a.
Wedding in a Year: For her S$20K wedding and honeymoon fund, one-year T-bills are a suitable choice. Backed by the Singapore government, T-bills are sold at a discount and mature at face value. Amy can consider the one-year tenor T-bills, with an estimated return of 3.7% p.a.
With this cash optimization, she could balance maintaining sufficient cash and maximising her annual returns at around 3%, capitalising on the higher interest rates in the market.
Amy’s Cash Planning
*Cash+: You can expect to receive your funds in your local banks by 7PM SGT the next business day (T+1) for all requests made before 11AM SGT.
To find out more our cash management solutions:
