Cash is Liquid
Since I entered the workforce proper in 2010, I’ve always had, at the back of my mind, the intention to have some disciplined cash-savings in the case of using it a rainy day, should it come. However, cash is very liquid. One look at the ATM, and you feel richer looking at your savings already. Like every man on the street, won’t you feel like taking some out, just to reward yourself with a small, itsy bitsy, tiny purchase?
Keeping Cash for the Long Haul
Well, I’ve always struggled with that. The temptation to go trigger-happy on my savings. Hence, I thought this solution was best for me (which could also be a good suggestion for you too, depending on your needs) – to discipline myself in apportioning a small percentage of my income to forced-cash savings. As cash is also an asset class and can be a component in asset allocation, I thought it’d be best to amass a small war-chest of cash savings for the long run (with a little bit of protection, no harm right?).
Cash is Low-Risk
Keeping cash is a low-risk (not to be mistaken as “zero / no – risk”) alternative as it provides a base value for your assets in the allocation. This prevents your riskier, higher beta-assets from losing value too quickly in an under-performing, down-trend economy, or as crisis-levels. However, this does not protect it from the effects of inflation or currency-fluctuations, hence it is not immune from inflation risk nor will it give you the same purchasing power in other countries should your base-currency (in my case, the SGD) weakens.
The Search For Protection
Knowing the above points, I felt that I needed a flexible option to protect my cash and my family situation for the longer term (~20 years). It is not meant to beat inflation, it’s just to ensure that my capital is protected and my family inherits something in case anything unexpected happens to me.
After comparing fixed deposits from the bank and endowment funds, I felt that endowment funds were more suitable for me than fixed deposits. Fixed deposits offer slightly higher interest rates than the regular savings interest rates no doubt, which are, of course much better than an endowment fund. However, my objective is clear: I need to protect my capital (not necessarily going for gains) and be able to leave something substantial behind.
Fixed Deposits – A Cash Commitment
Why not fixed deposits? Unless I wanted to beat inflation / currency-fluctuations or to even have some interest gains on my cash deposits, I wouldn’t want to place it in a fixed deposit because there are other better options such as equity, bonds, structured deposits / notes etc. Of course, high returns naturally come with high risk.
Secondly, I feel deposits are good for short-medium term to set aside that cash for a bigger ticket item. It could be set aside for a car, perhaps a one-shot pre-payment of a mortgage loan, house renovation (1-3 years), or best, when an economy collapses over the next 3-5 years, which is an excellent opportunity to snag up some under-valued stocks / bonds.
Some things to take note for fixed deposits:
a) they are lump-sum and pre-committed cash you have set aside.
b) they are a commitment for a short-medium term (1 year – 5 years etc), cash set aside for a specific purpose.
c) they are not an investment vehicle, not even close. However, they can be used to bolster your investment portfolio in the form of fixed savings.
Endowment Fund – Defender of Cash and Death
Now based on my current endowment fund (read: insurance plan) with PruFlexiCash, it is an alternative to the fixed deposit in the sense that I am most probably able to get back an amount close / or break-even to the total premiums invested (at the end of 20 years, held to maturity), on top of having a little more insurance coverage on my life (I’ve actually worth something! woohoo).
In a modern society, we are living longer lives. If we were to pass on at an early stage, the people around us, wives, kids, parents and family in general, will be affected in more ways than one: Emotionally (Security), Physically (less 1 able-bodied person to help around), Psychologically (Stress), and Financially (Loss of 1/ main Stream of Income).
As I’m working hard to support my family (parents) and even start my own (get married, purchase a place to call home), I felt the need to plan early. Hence, this was the most suitable way to preserve some cash, and at the same time, pass on the benefits in the event of a unexpected fateful event (read: premature death) – which is why, the endowment fund.
Here is a screen shot of the plan I am contributing to:
The features of the fund includes:
1) Accelerated Terminal Illness – pays out a lump-sum (100%) upon diagnosed with a terminal illness
2) Accelerated Disability – pays out a lump-sum (100%) upon diagnosed with disability
Reversionary Bonus, Interim Bonus, Accumulated Cashback
The endowment fund is a participating fund. This means that the premiums paid is conservatively used by the insurance company to invest. When this happens, they may / may not profit from the investments. As such, should they profit, they will reward the policy owner, with a bonus. This bonus is called a Reversionary Bonus. The bonus can be paid out at the end of the year, or during the year (Interim Bonus).
Since the endowment is amassing cash savings which I’m contributing on a monthly basis, this cash is actually gathering interest (not any different than your regular savings account, but interest rates may differ). This interest is paid back into my endowment fund via the accumulated cashback.
In other words, once my policy matures, I’ll be getting back a huge portion of my savings (with the bonuses and cashbacks include) with additional insurance coverage on my life. I actually hope to use this regular-premium plan to save up for future investment purposes so it’s a win-win for me. ;)