Set each rung to mature a safe margin before the date you need the money.
When you save for something large, the money rarely goes out in one payment. It usually leaves in several payments on different dates, and each one has to be in your account by its due date. A ladder is a set of savings rungs, each matched to one of those dated bills. You build it backwards, starting with the bills you have to pay and only then looking at the products on offer.
Wei Ling and Jun Hao (a made-up couple) are saving for a wedding and a flat. They like the idea of a ladder but got stuck on the first rung, unsure whether to choose a six-month T-bill, a twelve-month fixed deposit or an SSB. Choosing products first is starting from the wrong end.
Start instead by writing down every payment the goal involves, with its amount and due date, as specifically as you can. A wedding is not one bill. There is a venue deposit, a balance closer to the day, and smaller sums to photographers and others along the way. A flat is not one bill either.
When the couple did this, their list came to S$45,000 (invented figures):
Banquet deposit: S$3,000, due in about two months Banquet balance and other wedding costs: S$12,000, due in about eleven months Payment at key collection for the flat: S$15,000, expected in about two years Renovation: S$15,000, due after they get the keys, roughly two and a half to three years from now
The check is S$3,000 + S$12,000 + S$15,000 + S$15,000 = S$45,000. Put your own list in date order like this. Each line becomes one rung, or part of one: a bill matched to an instrument that matures before the bill's due date.
For each bill, choose an instrument that matures before the due date, leaving time for the money to reach your account and for any delay. This gap is the margin, and how much you need depends on the instrument.
A fixed deposit pays out on its maturity date. A T-bill pays face value into your account on its maturity date, as Lesson 4.4, "Paying with cash, SRS or CPF, and what each really costs", described. Both are maturity-dated rungs. They need at least a few days of margin, and more if the payment must clear on a fixed day.
An SSB works differently. As Lesson 3.3, "Getting your money back early, and what it costs you", explained, you request redemption in one month and the money arrives early in the next month. An SSB rung therefore needs about a month of notice before the bill.
As a practical rule, aim for each rung to be in your account two to four weeks before the bill is due. That covers settlement, a weekend or public holiday, and a bill that turns up a little early.
The time until each bill narrows the choice of instrument. For something only weeks away, a savings account is usually the answer, because applying for a T-bill or SSB and waiting for it to be issued takes longer than the time you have.
For dates under a year, T-bills and fixed deposits fit. Their terms run from a few months to a year, and their rates are fixed for the whole term.
For dates beyond a year, the choice widens to SSBs, SGS bonds and longer fixed deposits. An SGS bond that matures before your date locks in a rate with no price risk if you hold it to maturity. A longer fixed deposit does the same, if the bank offers the term you need. An SSB pays less in its early years than its ten-year average, but you can redeem it in any month, so it suits a date that is uncertain.
Wei Ling and Jun Hao keep the S$3,000 deposit in their savings account, because two months is too short for anything else. The S$12,000 goes into a fixed deposit with a term ending about a month before the wedding. The S$15,000 for renovation goes into a two-year fixed deposit. When that matures, they plan to put the money into a six-month T-bill that ends before the renovation starts.
Some dates are firm. The couple's banquet is booked for a Saturday in November, and that will not move. Other dates are estimates. The key collection date for a new flat can shift, and when renovation starts depends on contractors and approvals. Mark which of your dates are firm and which are estimates.
For the uncertain dates, build in a buffer. You can do this in three ways, alone or together. The first is to choose an instrument you can exit at no loss, such as an SSB: if the date comes forward, you redeem early, and if it slips, you leave the money in and it keeps earning. The second is to keep a slice of cash in a savings account for anything that arrives sooner than expected. The third is to aim the maturity earlier than your best estimate and accept that the money may sit in a savings account for a few weeks.
The couple put the S$15,000 for key collection into an SSB, because that date could move. If it comes forward they redeem early, and if it slips they leave it there to keep earning.
Avoid any rung you can't reach without a loss if the date moves earlier. The classic mistake is a long fixed deposit for a date that might come forward. Lesson 5.3, "Breaking a deposit early", showed that breaking one can cost most or all of the interest.
When Wei Ling and Jun Hao finished, every line on their list had a date, an amount and an instrument.
Now do the same for one real goal of your own. Write out every payment with its amount and due date, and put them in date order. For each payment, pick an instrument and a maturity that gets the money into your account two to four weeks early, or about a month early for an SSB. Mark which dates are firm, and add a buffer for any date that might move.
Take one real goal and list its payments with amounts and dates. Next to each payment, write the instrument and maturity you would use.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).