Let’s say, I have RM 50,000 in excess cash.
I intend to have them as my emergency fund. In other words, it is money, which I could certainly have access to quickly if I need it. Obviously, FDs are one of the places to park such money. But, with FDs ranging between 2.0%-2.5% a year, do we have other alternatives to manage our excess cash efficiently?
The answer is yes and I found 9 other places to park excess cash. Hence, for this article, I would like to list them down and discuss their pros and cons. Here, it is important to note that one is not necessarily better than another vehicle and in practice, we could use a combination of these 10 vehicles (including FDs) to put and manage our excess cash. They are as follows:
#1: Digital Cash Management Platforms (DCMPs)
The key providers in Malaysia include KDI Save, Versa and StashAway Simple. As I write, they offer depositors an easy way to earn daily interests from the excess cash deposited. Unlike FDs, they don’t have locked-in periods. In other words, if depositors choose to withdraw money, they could do so without forfeiting their accumulated interests. Presently on 1 October 2022, their interests offered are:
KDI Save: 3.50% per annum (until 31 December 2022 for the first RM 50,000)
Versa: 3.20% per annum (until 31 December 2022)
StashAway Simple: 2.90% per annum (no time limit revealed)
#2: Skim Simpanan Pendidikan Nasional (SSPN)
SSPN is a savings scheme which allows us to earn yearly dividends from funding local students their tertiary education fees in Malaysia. SSPN has paid out 4% in annual dividends in 2015-2020. In 2021, its annual dividend was lowered to 3%, which is on-par with the DCMPs listed above. But unlike DCMPs, dividends from SSPN are computed differently and hence, require a calculator to calculate your final dividends.
So, are DCMPs better than SSPN?
Not quite, especially if your tax bracket is above 21%. This is because you would be entitled for RM 8,000 in income tax relief worth RM 1,680 (based on 21%), if you placed a net deposit of RM 8,000 into SSPN. Your tax savings will be more if your tax bracket is higher than 21%. Hence, if you earn RM 100,000+ per year, it is worth considering for you to put RM 8,000 into SSPN to claim this tax benefit, collect dividends, and enjoy the flexibility of withdrawing from SSPN.
#3: Employee’s Provident Fund (EPF)
We could contribute up to RM 60,000 voluntarily into our EPF account. I believe this is a good way to build up our retirement funds. Obviously, we will forgo our rights to withdraw money from our EPF account as we please. But from the EPF website, we are allowed to withdraw from our EPF to meet true emergencies in life. To name a few, they include critical illness, disability and death. For EPF, the amount contributed is entitled to a maximum RM 4,000 in tax relief.
#4: Home Loan Accounts
This allows mortgagors to save on interest costs incurred from their mortgages.
Typically, mortgage rates are higher than FD rates. Hence, if you have a full-flexi or semi-flexi loan account, you can choose to use them to save on interest costs from your mortgages. For semi-flexi loan account holders, you may incur a little charges from the bank, if you want to withdraw money from your loan account. So, you may want to weigh in other options listed here before deciding to do so for your excess cash.
#5: Foreign Currency Accounts (FCAs)
This is suitable, if I’m interested in placing my excess cash into other currencies, which include SGD, AUD, JPY, USD, CHF, and so on and so forth. They could offer some hedge, if the Ringgit falls against these currencies. Most local and oversea banks such as MBB, PBB, CIMB, RHB, and HSBC do offer such accounts. So, FCAs can be opened by simply taking a trip to your preferred banks.
#6: Cryptocurrencies (Cryptos)
This seems to be increasingly popular. Here, if your objective is to build yourself an emergency fund, I think it all depends on how you deal with their volatility & unpredictability for the short-term. So, no comments on its practicality as a way to build your emergency fund.
It is possible to build a stock portfolio that acts like a ‘FD portfolio’. This involves including only fundamentally solid stocks that pay consistent dividends into our stock portfolios. If it is done correctly, the investor would receive dividends on a regular basis, typically 8-9 months per year. But obviously, there is some degree of volatility in the stock market. Hence, this would be for you, if you are good at stock investing. Otherwise, this option is not practical for you.
#8: Unit Trust Funds
Unit trust funds are funds which are pooled to invest in appointed investments. They may include stocks, bonds, and money market instruments. There are unit trust funds that pay income distributions to their investors. But, I find that most unit trust funds use capital gains as their measure of performances. As such, for this option, we need to be okay with market fluctuations.
So, what type of fund or funds should I choose?
Personally, if I’m building an emergency fund, I would opt for funds that are low cost, low FVF (volatility), and low PTR (portfolio turnover ratio). Currently, if you don’t know what FVF and PTR are, it is better for you to get educated first, prior to committing your money into some unit trust funds.
#9: Exchange Traded Funds (ETFs)
ETFs are somewhat similar to unit trusts but they can be of lower costs due to a more passive-style approach in managing funds. KC Lau had written a beautiful, simple, and elaborative article on ETFs. But here for this option, it is crucial that you know how to pick an ETF in the first place. Otherwise, you may lose money, which could be meant for your emergency fund, in the ETF market.
Conclusion: Which of the 9 Places Should I Choose?
Well, it depends on your investment knowledge and experiences. In your case, I would say that the first 4-5 options are suitable for you if you are not interested in investing your excess cash. But, if you could take some volatility, then, option 6-9 would be something that you may consider. If you are undecided, you could split your cash into 50:50, 60:40, or whatever ratios that work for you and place them into your preferred options, which by the way, includes FDs.