How High-Yield Savings Accounts are Structured in Singapore

03 September 2020

Advertised rates on savings accounts aren’t as straightforward as they seem. Look closer at the fine print and you’ll see that the rates are tiered, and you need to fulfil multiple conditions to unlock those rates. These conditions can make managing cash in a savings account a huge hassle for you.

Here, we’ll go into how high-interest savings accounts are structured, and why it’s difficult to grow your cash in a savings account.

The tiered interest structure on a savings account

Did you know that an advertised rate of 2.5% on a savings account doesn’t apply to your entire cash balance? Instead, the high rate applies to only a portion of your cash in a tiered interest structure. A tiered structure on a generic savings account could look something like this:

Savings account tiered interest structure

Assumptions: Rate and tiered structure based on average rates on high-yield savings accounts as of 3 August 2020. The average interest rate on a $75,000 SGD is calculated based on simple interest earned after 12 months. 

As the table shows, you’ll enjoy the highest interest, or 2.5% on only $15,000 SGD of your total deposit. On top of that, you’ll have to put up $75,000 SGD before you even get to enjoy that 2.5%. Doing the math on the tiered structure, you’re really earning 1.86% on your $75,000 SGD deposit.

Anything less than $75,000 SGD and you’re getting a lower rate. So, if you have $50,000 SGD, you earn an average of 1.62% p.a, if you have $20,000 SGD you earn an average of 1.28% p.a, and so on.

But if you have $100,000 SGD, the additional $25,000 SGD won’t earn 2.5% either. In fact, that additional amount earns only the base interest rate, or no interest at all. That’s because banks cap the amount that can earn the high interest rate. So, if you want to earn a rate on every dollar of excess cash you have, you might have to juggle multiple savings accounts because of these caps.

The tiered interest structure comes with more conditions

There’s no denying that earning an average of 1.86% on a $75,000 SGD deposit is still pretty good. But, here’s the kicker: you can’t unlock the rates on the tier by only depositing cash, you have to fulfil other conditions too.

Unlocking the tiered interest rates requires you to spend on the bank’s credit card, credit your salary, or make GIRO transactions. Or, you might have to fulfil all three conditions to unlock the rates on the tier!

To illustrate, to earn 1.2% on your first $15,000 SGD, you’d have to spend a minimum of $500 SGD on your credit card and make 3 GIRO transactions every month. Otherwise, your cash only earns the base interest rate as shown in the table below.

Conditions to fulfil to unlock the rates on the tiered structure

Now, on top of having to make sure that you maintain your cash balance at a certain level, you also have to make all the right transactions on your savings account to qualify for the higher interest rate.

Why it's difficult to grow your cash in a savings account

The tiered structures on savings accounts ensure that you put just enough money in the banks to help them manage their capital better for lending, but not too much that they’d have to pay you more in interest for your deposits. And, banks also profit from the fees across all their products and services. That’s why banks integrate credit cards, GIRO transactions, investments, and other requirements into their tier structures. These conditions are meant to incentivise you to use products from which banks can earn more in fees.

Rethink the way you manage your cash

It can be disheartening to know how much work goes into earning a rate on your cash. That’s exactly why we built our cash management portfolio, StashAway Simple™: To make cash management hassle-free. Unlike savings accounts, you can earn a projected rate on any amount of your excess cash, or emergency fund without having to fulfil any conditions.

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