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Newly married and planning to have a child: Questions.

Friday, January 16, 2015

Is there anyone here who might be in a similar situation as this reader?

Hi AK,
Happy weekend to you. I see that you have recently posted quite a lot on saving and contribution to SA for retirement. This has really set me into thinking, seeing the benefits of compound interest. 

However, as I only started to work for 2.5 years and juz got married and got a house, my situation may not be favourable for making huge moves in my savings. Below are some pointers that I may need your input.

1) I did think of volunteering to contribute to CPF thru cash but as I juz started a family, cash flow could be very important especially we are planning to have a kid next year. Would you advise us to still bite the bullet (like seriously) and still contribute or wait till we are more comfortable before we start contributing? We both own some small portfolio of reits.

2) As we find it hard to contribute cash to CPF, how about transfer in from OA to SA lump sum when we get our bonuses to exploit the higher Interest rates? Alternatively we can opt to pay down our house with the lump sum, which lower our loan and perhaps it more worth it as the small monthly payments we are paying now in the initial phase mostly go towards interest. :( What would you do if you are us? Haha

Thanks AK. As usual, look forward to your enlightening reply. :)

Regards,
B


My reply:

Hi B,

Yes, the blog posts are meant to set people thinking. They are not meant to be advice. OK, this is where I talk to myself. ;p

1. Get my priorities right. Now, I have a family and planning to have a child next year. Need money. Budget. Make sure that the money needed for this has been or is being put aside.

2. Do I have an emergency fund? Is the emergency fund able to cover 12 months of regular personal, household and other routine expenses? This would include the necessary insurance coverage.

3. Before I do an OA to SA transfer, check whether there is enough funds in the OA to pay the monthly mortgage for at least 12 months? If there is, the balance, I could think of transferring to the SA.

4. What is the interest rate on my housing loan now? Am I able to get better returns by investing my funds instead of paying down the housing loan? However, ask am I risk averse? Would paying down the housing loan give me peace of mind (which is priceless)?

I hope these questions will help you find the answers you are looking for. :)

Best wishes,

AK


If you have any ideas or relevant experience to share, please leave a comment for us here. Thank you very much.

Related posts:
1. Achieving level 1 financial security.
2. Options for CPF-OA with a new flat on the way.
3. PM Lee Hsien Loong on retirement adequacy.

13 comments:

AK71 said...

My reply to a comment on my FB wall:

"Wiping out the OA is pretty risky. I remember during the AFC, a couple who became jobless said that if they had left money in their OA instead of doing partial capital repayments (to save on interest payment) which left their OA with almost no money, they would not have had to go around borrowing money from family and friends to pay the monthly mortgage of their home. So, this is the rationale for me saying that there should be enough money in the OA for at least 12 months of mortgage payments (but more would be better)."

Derek said...

Insurance talk here,

"To prevent your property from wiping out your OA, you should invest part of it. This way your money will be lock up and if you need the money for your mortgage, you can liquidate the investment."

Hmm..when such a scenario happen, it usually mean the economy is not doing well. And if the economy is not doing well, wouldn't I have to sell my investments at a lost?

AK71 said...

Hi Derek,

Don't use money earmarked for housing to invest in equities or something else.

I know what you are talking about. There are insurance agents who would suggest such a strategy to people who are buyers of HDB flats.

If these agents have explained to the buyers the potential for a capital loss with such a strategy, I am sure many people would choose not to do it. Not many are willing to risk this.

I feel that any buyer of HDB flats should be prepared for an initial wiping out of their CPF-OA. The money is locked up in their home. There is no risk.

Over time, they should build up their CPF-OA's funds again. This is when they should have a buffer and this ties in with my earlier comment on how much I think is enough if we still have a HDB mortgage to service.

AK71 said...

From my FB wall:

LazyCat LC:
Hi. I am newly married too and I paid the downpayment 2 years ago for my BTO flat which will be ready in another 2 years. Like most people, I happily paid the downpayment in CPF. Now whenever I look at my CPF statement I see the accrued interest amounting to 4digit already. Sometimes I wonder I should have paid in cash first, let the OA downpayment amount accumulate for the 4 years (while waiting), and then empty the OA again when the flat is ready. Any thoughts?

AK:
If you were able to grow your cash on hand at a rate that is faster than 2.5% per annum, then, it makes sense to hold on to your cash.
Having said this, remember that cash on hand is near money. CPF is not. Money unutilised for any reason and sitting in the CPF-OA can only be withdrawn at age 55 after the MS is met. So, it depends on your circumstances and what you are comfortable with.

AK71 said...

LazyCat LC:
Thanks AK. That's why I would advocate young people who are getting BTO flat to be aware of this option as well and not choose CPF as the default payment method.

Using OA for downpayment vs using cash/partial cash for downpayment.

Assuming that the couple would take a HDB loan, the OA account would be emptied anyway when the flat is ready. So if one were to have spare cash to use for downpayment, it can be seen as an investment with 2.5% (or+1%) yield to be "matured" for housing loan use a few years later.

AK:
That is a good way of looking at it, especially if the couple do not have the time nor the inclination to make their money work harder to get a return of higher than 2.5% per annum.

MSAPersonalFinance said...

Hi,

Personally I will prefer resale flat than BTO. It really requires a lot of patient to wait for several years for the flat to be ready.

AK71 said...

Hi MSA,

For people who are not in a hurry to buy a flat, a BTO flat makes good money sense.

A resale 4 room flat in a non mature estate could cost $400K but a BTO 4 room flat in the same estate could cost only $250K. The savings can be quite substantial and for a young couple, the savings could go a long way to help meet other forms of expenses.

MaoMao said...

Dear B (the reader),

Transfering your OA to your SA is irreversible. It is not an immediate Get Rich scheme. Please let this concept sink into your head first.

OA can be used to pay for your child's education too. Please take note.

yeh said...

Hi ak
Have you settled your house loan?

I still have about 280k outstanding hdb loan.

I wonder should i use all my and hubby's cash n cpf to settle the housing loan.

I was so busy recently, no time to check what is the current interest rate now.

Heard my friend saying the interest rate did raise a bit.

My sister advised me to do refinancing.

I discussed with my hubby. He said no silly to use cash n cpf to settle housing loan.

Then I am wondering should use that amount of money to buy more share.

I keep buying these 2 years, now I am having a 400k portfolio with 21k paper losses.

my housing loan package interest rate is based on sibor interest rate.

my war chest ( low 6 digit amount) has been sitting in bank for 2 years.

AK71 said...

Hi yeh,

Well, unlike the last time I had a home loan, the interest rates are still pretty low now.

I remember when I paid off my last home loan, I was paying about 5.1% in interest a year. That was exhorbitant!

Now, my home loan has an interest rate of about 1.3%. A bit lesser than that, probably, even with the recently higher SIBOR. I think that makes it rather inexpensive and it probably makes sense to hold off paying down the loan for now.

I have put aside enough cash to pay off the loan but it could possibly be used for investment opportunities if there should be a stock market crash. Of course, if interest rates were to shoot through the roof, I would use the cash to pay off the loan.

While waiting, I leave my money in CIMB to receive an interest of 0.8% per annum and some FDs that pay 1.1% to 1.25% per annum. So, effectively, the cost of not paying down my home loan is not that high. :)

FF said...

Hi AK,

Thanks for all your articles. Stumbled upon them while searching for investments in Singapore. They are really informative!

I will like to see your advice regarding the transfer of OA money to SA.

I am a uni student now and have like 5k plus in OA account from work done before. Do you think it is advisable to transfer all to the SA account now to help me earn the interest? I will grad in 2017 and start working in June.

Marriage plans will only come in 2020 earliest though. Not sure if i should keep the money in the OA for the hdb downpayment!

AK71 said...

Hi FF,

Welcome to my blog. :)

OK, firstly, you have to know that I am not giving advice here in my blog. Just talking to myself. ;)

For me, I had no concrete plans to buy a HDB flat 3 years after graduation. So, I transferred all my OA money to my SA in the first 4 years of working life.

As things panned out, I only bought my first property in my mid 30s. By that time, my CPF-OA was recharged and I had more money on hand. So, my ability to purchase a property was not affected badly although I transferred all the money from my OA to the SA in the early years.

Of course, the funds I transferred to the SA grew very nicely and will continue to grow.

What we do with the money in our OA now depends on our circumstances and whether we have made plans which involve the use of the same money now or in the near future. :)

FF said...

Hi AK,

I understand! We are all having a discussion here. :)

So it comes down to our own plans for those money in the OA and whether there's a need for them in the near future.

Thanks for sharing your experience. It has certainly shown me alternative ways of thinking and doing!

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