You will assign each pot of lower-risk money you hold to the instrument that fits its timing and purpose.
Arjun's lower-risk money is spread across five places, picked up one at a time over several years: a savings account, a fixed deposit that keeps renewing, two SSB issues, a T-bill he rolls when he remembers, and a bond fund. Each choice made sense when he made it. He has never looked at them together against what each sum is for. This exercise puts every pot of safe money you hold on one page and checks that each one sits in an instrument that fits its job. Allow about 20 minutes.
All figures in the example are made up.
A pot is a sum with one job. Your emergency fund is a pot. Money for a wedding, a home, a course or a car is a pot. The bond part of your long-term investments is a pot. If one account holds money for two jobs, split it into two pots on paper.
For each pot, write three things: the amount, when you might need it, and how bad a 10% fall in its value would be on the day you need it. Use plain words for the last one: fine, awkward or a real problem.
Arjun's list reads like this. Emergency fund, S$18,000, needed at any time, and a 10% fall would be a real problem. Wedding, S$25,000, payments over the next 18 months, a real problem. Home fund, S$40,000, needed in about four years, a real problem because it is going into a down payment. Long-term bonds, S$20,000, not needed for twenty years or more, fine.
Choose from the six instruments in this course: savings account, fixed deposit, SSB, T-bill, SGS bond and bond fund. A pot can use more than one, as long as you say which part goes where.
Arjun assigns them like this.
The emergency fund goes partly into a savings account and partly into an SSB, following lesson 3.4, Decide whether an SSB fits your safe money: the part he might need within days stays instant, and the rest can wait for an SSB redemption.
The wedding goes into T-bills and fixed deposits that mature a few weeks before each payment.
The home fund goes into an SSB, which he can redeem at face value whenever the purchase happens, and, if he is confident of the date, part could go into an SGS bond maturing before it.
The long-term bonds go into a bond fund, as lesson 7.3, When owning the bond beats owning the fund, suggested for money with no date.
Test each assignment against three questions. These come straight from the course so far.
Access speed: can I reach the money as fast as this pot might need it? An SSB redemption takes until the next month. A fixed deposit is locked unless broken. A T-bill is locked until maturity.
Price risk before the date: could this instrument be worth less than I put in on the day I need it? Savings accounts, fixed deposits held to maturity, SSBs, and T-bills and SGS bonds held to maturity all return their full amount. A bond fund, or an SGS bond sold before maturity, may not.
Credit risk: who owes me this money, and how sure am I they will pay? Government instruments and insured deposits within the SDIC limit sit at the safe end. Corporate bonds and many bond funds do not.
The point of the map is to catch a pot sitting in the wrong place. Look for any pot where the answer to the price risk question is "yes, it could be worth less" and the 10% fall would be a real problem.
Arjun found one. Before this exercise, his home fund was in the same bond fund as his long-term money. That fund has a duration of about 6. A one point rise in yields could cut its value by about 6%, roughly S$2,400 on S$40,000, and a bigger rise could push it past 10%, or S$4,000, just as he needs the deposit. Nothing in the fund's structure, as lesson 7.1 explained, would bring the price back in time. He flagged it and moved the home fund plan to an SSB.
He also noticed his fixed deposit was set to renew at the board rate, which lesson 5.1 warned about. That one is not a mismatch of instrument, but it went on the list too.
A finished safe money map is one table. Each row is a pot, with its amount, date and how bad a 10% fall would be. Next come the instrument or instruments assigned and one line of reasoning. A final column holds any flag. You should be able to read it in a minute and see that no pot that must be whole on a date is sitting in something that could be worth less on that date. Build yours now for every pot of lower-risk money you hold.
Complete the safe money map for your own pots, assigning each to an instrument with one line of reasoning per pot.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).