Is Cash King?

When we speak with new clients, one topic that frequently comes up is having too much cash in the bank that is not working for them. This is particularly true as most brick-and-mortar banks in SG and the US offer low interest rates on cash. Moreover, for US persons in SG, a lot of the local investment platforms will not work with Americans, and the investments are US tax punitive as they are classified as Passive Foreign Investment Companies (PFICs), which leaves limited options.

In this respect, common questions that come up are: What should I do with my cash? Should I invest it? What should I invest it in? How much cash should I keep in the bank? How can I make my cash work for me? The answers, as is common in personalized wealth planning, are: “it depends.” There are, however, a few considerations for expats:

Emergency Fund

Whether it is rent, international school, a car/Grab rides, or a cold Asahi on a humid day, a common topic of conversation is the high cost of living in Singapore. If you were to lose your job, it is important to have sufficient cash in the bank to cover at least 6-months of living expenses while you find other work. The 6-month target could shift based on:

Whether both spouses work, and you can rely on the other’s income.
High or low risk tolerance.
Viability of getting another job quickly.

A good starting point is to first consider how much you would need in an emergency to get you over an obstacle for several months.

Tax Clearance

In SG, it is possible to pay tax in arrears monthly via GIRO. For example, if you work in SG during 2023, receive your Notice of Assessment in March 2024 stating S$120k of tax is due for income earned the previous year, rather than paying it all at once, you can pay it over the next 12-months in increments of S$10k/mo. This is a nice benefit as the balance due has a 0% interest rate! Essentially, IRAS gives you a 1-year loan of S$120k and does not charge you interest. This is a big difference from the US IRS, which would penalize you for not making 2023 quarterly tax payments during 2023.

The counterpoint for GIRO is that if you decide to leave Singapore in July 2024, you will owe S$90k of tax from 2023 plus tax due from the 6-months of income you earned in SG during 2024.* This can be a rude awakening for those relocating and is one of the reasons we stress planning early and ensuring there is sufficient “get out of town” cash. Moreover, this cashflow issue is magnified if you relocate with your current employer and have unvested Stock Options or Restricted Stock Units as there would be a deemed exercise on the unvested value.

Moving Costs

On the topic of relocating, moving is generally more expensive than anticipated. Between flight tickets for a family, a shipping container, pets, potentially breaking a rent lease, and new cars and furniture, among others, this can easily add-up to $50k–$100k USD.

In this respect, keeping more of a cash buffer for those thinking of relocating within the next 1–2 years is beneficial.

Goals

It is vital to consider goals within your financial plan. This could be a home purchase, starting a business, or upcoming college costs, among others. Many clients, especially those in SG who have been paying high rent to a landlord for years, are eager to own real estate and begin building equity in it. A downpayment is often one of the most expensive goals within a financial plan, particularly for those looking to buy in a desirable location. Moreover, if thinking of starting a business, there can be a significant upfront cost and months-to-years of lower income, which should be accounted for.

On a side note, it is important for US expats to maintain their US credit score while abroad or it can complicate the purchase process and increase mortgage interest rates. Many lenders do not work with expats as pay statements are in a foreign currency—it isn’t the typical W-2!

Increase Yield

As described above, there are reasons to keep cash in the bank. However, that does not mean you must settle for a low amount of interest. There are various ways to increase yield (e.g., online savings accounts, CDs, Fixed Deposits, Singapore Savings Bonds, US Treasuries, etc.). The suitability of each of these will depend on individual circumstances. We work with clients to determine the best option(s) for them and assist with implementation.

As another aside, it is important to keep in mind that only limited amounts of cash are insured at banks. In SG, this is a lower threshold than in the US, as only S$100k/bank is insured under the Deposit Insurance Scheme.

Invest

While it is important to keep sufficient cash, it is equally important to invest.

We stress “time in the stock market” as opposed to “timing the stock market.” By investing, you give funds the opportunity to grow and compound over time, which makes a significant impact over the long term.

The below graph demonstrates this impact of investing just $6,000/yr over 30 years. In total, you will have contributed $180k, but there would be ~$323k of pure investment growth, and the final account value would be ~$503k! This is the power of compounding and making money work for you.**

Like many things in life, balance is important: work and family, exercise and rest, healthy food and chocolate cake, spending and saving, and cash and investments. We work with clients to determine an appropriate cash amount and optimize personal finances over the long term.

For more information on how to best optimize your cash and investments, please reach out to one of our wealth planners.

*Assumes 3-months of payments

**Assumes 6% Annual Rate of Investment Return

This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual. Additionally, you should consult with your Financial Advisor, Tax Advisor, or Attorney on your specific situation. The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, or Association. All efforts have been made to report or share true and accurate information. However, the information may become materially outdated or otherwise rendered incorrect due to subsequent new research or other changes, without notice. The author nor the firm are able to always verify the content from third-party sources. For additional information about the firm, please visit the MAS Website at https://www.mas.gov.sg/ and the SEC Website at www.adviserinfo.sec.gov. For a copy of the firm's ADV Part 2 Brochure, please contact us at info@avriowealth.com.