MAKING SENSE OF DEPOSIT ACCOUNTS

14 May 2011
Lui Su Kian

Most people understand the importance of savings and are used to maintaining their money in a bank's deposit account.

However, over the years, the simple deposit account has proliferated into many versions with varying features. These include savings, current, fixed deposit and structured deposit accounts. So how does one determine the type of deposit accounts he or she should go for?

Deposit accounts can be broadly classified into four categories - transactional, regular savings, lump sum saving, and save and invest.

STARTING WITH THE BASICS

Everyone should have a deposit account for day-to-day transactional purposes. A savings or current account will ensure convenient access to your money and allow you to better track your expenditure, rather than keeping large amounts of cash with you.

Some of the considerations when opening such an account are whether the bank offers a wide network of branches and ATMs, and has round-the-clock access via Internet or telephone.

With more merchants and organisations accepting cashless payments, the account should also allow you to make payment easily, such as through GIRO, fund transfers, and online bill payments.

USING A DEPOSIT ACCOUNT TO SAVE REGULARLY

The deposit account is also a tool to help you start saving. It is ideal to save at least 10 per cent of your monthly income or allowance. Most banks offer special savings accounts which reward you with better interest for the commitment to save monthly. Some of these accounts help to establish discipline in savings by automatically transferring a specified amount from your salary credit account to this special account monthly.

Treat this as a way to pay yourself first. Choose a date shortly after your pay day to have the funds transferred to this special account. Set the sum you can comfortably afford as some of these special accounts will impose a penalty if you fail to fulfill the commitment to save monthly.

MAKING YOUR DEPOSITS WORK FOR YOU

While choosing to leave your savings in your deposit account provides you with immediate access to your funds, you should be aware that the value of your savings can be gradually eroded by inflation over time against a low interest rate environment.

To reduce the impact of inflation, you can choose to move part of your funds into a fixed deposit account to enjoy slightly higher interest by locking in the funds for a few months to a year or two. A fixed deposit is relatively low risk as you will receive your principal amount and interest as promised on maturity.

Do note that, in an extremely low interest rate environment, the interest differential between fixed deposit and savings account can be almost negligible. Thus, do your math before deciding if it is worth your effort moving the funds between a savings account and a fixed deposit.

If you are looking for better returns, are prepared to lock-in the funds for several years but do not wish to risk your principal sum, you can consider a structured deposit. However, make sure that you fully understand how your returns will be determined as not all returns are guaranteed. Know what are the underlying investments, and the terms you must accept, such as restrictions on withdrawal. Look beyond attractive returns as higher returns generally translate to higher risk and make sure you understand the terms you will be subjected to.

MIX AND MATCH TO GET THE IDEAL SET

Some people have a combination of various deposit products. Some even use several accounts for the same purpose.

Before opening a new account, you should consider if it is necessary to divide your savings among a number of accounts as it could mean account fees if you are unable to maintain the minimum balance required.

You may also be able to take advantage of a higher interest rate if you maintain a higher balance for certain deposit accounts.

You should also ensure that you select the deposit product that suits your needs instead of the one that gives you the best returns. For example, you should not use your fixed deposit account for day-to-day transactions as that can result in a loss of returns.

Most of the above deposit products are available in Singapore dollars or foreign currency. While deposits in foreign currency can offer you potential foreign exchange appreciation or better interest, fluctuating exchange rates may also result into losses when you convert back to Singapore dollars.

Lastly, know that your Singapore dollar deposits, except for structured deposits, are covered by the Deposit Insurance Scheme. Your eligible accounts will be aggregated and insured up to S$50,000, net of your liabilities with the bank, should the bank fail.

Lui Su Kian is managing director and head of deposits and secured lending at DBS Bank.