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Beef up financially to attain financial freedom sooner.

Wednesday, April 22, 2015


How is your financial health?

Hi AK,


First stop, thanks again for sharing your knowledge on financial literacy. I have made progress again, lol! The best part is the progress is very tangible and someone could actually see these effects within months.

Anyway, I have a question on the topping up of our CPF. As much as I do understand that topping up the SA account is important, given the 4% risk free interest rate coupled with 0 re-investment risk, this is just too good to ignore. However, what do you think of topping up the medisave account to its mms before putting money into SA instead? 

Therefore, once the amount in medisave hits the ceiling , the amount that is supposed to be allocated into the medisave would go into our OA in which then one could subsequently transfer into the SA account. In this way, this will result in a higher contribution into the SA account per year. Do correct me if I'm wrong.

Something else which I would like to ask you is, what do you think is a good amount for Singaporean to set aside in the OA account assuming that they haven't bought their flat.

Just to share, I used to have this habit of wasting money on the latest gadgets released. After knowing you (technically yes, since a blog post is almost like a one-to-one conversation), whenever such thoughts of spending money crosses my mind, I transfer half of this money into CPF and the remaining half into a separate savings account. 

Without money being accessible, no money to spend, no money to waste! Best part, money is saved! Thanks again!

-P


Learn from the squirrels?


AK's reply:

Hi P,

I am very happy to learn that you are beefing up financially. Having financial muscles early in life will set the stage for, ultimately, achieving financial freedom later on in life. ;)

Should someone in his 20s top up his CPF-SA or the CPF-MA first? Well, my preference is to top up the CPF-SA first because the first $40K in the CPF-SA will earn 5% per annum. Topping up the CPF-MA has more practical considerations, of course. So, perhaps, after reaching $40K in the CPF-SA, switch to topping up the CPF-MA instead. :)

How much should we accumulate in the CPF-OA before buying a flat? I think this is rather subjective. So, please remember that this is just my opinion and I am going off tangent to share what I feel is more important.

I will try to use as little of my CPF-OA money as possible in the purchase of my home. This is because it earns a risk free 2.5% to 3.5% per annum. In the future, when I sell my home, I will have to pay interest to my CPF-OA (i.e. the accrued interest for the money in the CPF-OA I used). This was how I approached the subject on the use of my savings in the CPF-OA in the purchase of my first home donkey years ago.

I like how you ended your email. Yes, don't see money, won't spend money. I told this to a spendthrift friend before too. Haha... ;)

Best wishes,
AK



Where did our money go? Where?

Part of P's reply to this:

Hi AK,

Indeed, and learning that each step we take is bringing us closer towards financial freedom just makes things feel so much more joyful.

On the part of frugality, being frugal has made me happier as a person in total as I learnt to be contented with what I have while balancing the equation of needs and wants. 

Sadly speaking, as my generation of folks (gen y) are largely exposed to new age media content, its hard not to be taken in by those fancy marketing campaigns for the latest product and service offerings that are largely wants but hardly needs. Unfortunately, the result of which is more expenses incurred on an individual, worse still, these things hardly produce much tangible benefits to warrant the expenditure.

However, the best part is, we all have choices.  As opposed to spending, we could instead save this amount of money, and subsequently making them work harder for us through investments. If one has the discipline and is regularly putting aside income into savings while investing for a sensible return via both cash and the CPF-SA, financial freedom is not as far fetched as it sounds, and is in fact very achievable for a commoner like myself. 

On that front, I started out by reminding myself of the opportunity costs incurred for this purchase which would potentially set me back from my eventual goal. Now, I don't even have to post mental reminders to myself anymore, it has been infused into my habits. I hope I don't sound like a drug addict who has just successfully undergone rehabilitation. =P

Noted on the point you have made on the CPF-SA. Right before I started to type this email, I have already transferred a proportion of my CPF-OA into CPF-SA, resulting in a $40k amount in my CPF-SA. And upon keying some numbers into the calculator, I finally understand why $40k is seemingly the "magic" number and why the government has provided additional incentives in the form of an additional 1% interest rate on the CPF-SA account of below $40k. Yet another blessing for Singaporeans to count!

Yes! Money saved = money earned. You shared that before too.

I should be the one thanking you as your sharing has changed me and I'm sure many others as well. =)

I look forward to reading more of your posts!

Best,
P

Related posts:
1. Do the right things and transform our lives.
2. How did AK amass so much in his CPF-OA?
3. Don't see money, won't spend money.
4. Money management: Needs and wants.
5. A dollar saved is a dollar earned.

25 comments:

Flyingsaucer said...

could you help me to ask P why is 40k for the CPF SA is the magic number ?

Or do you know it , thanks :)

AK71 said...

Hi Flyingsaucer,

The first $40K in the CPF-SA earns a risk free 5% per annum. If we were to have $40K in the CPF-SA at age 30, for example, compounding at 5% per annum, even if we did not make another contribution, by age 55, this would have grown to be $135K. Looks magical to me. ;)

Well, let's see if P has anything else to add. :)

E H said...

The magic figure should be 100k in SA by age 35.

Sanye ◎ 三页 said...

If I were P (or any young person), I would continue to top up SA after the 40K, until I hit the max amount I can top up, before I considered switching to top up MA. Interest earned in SA after the first 40K and MA is the same. If MA hit max, CPF board will transfer the surplus to OA each year, whereas money in SA, even if it's above the minimum sum required, stays in SA to earn 4%.

Of course one can re-transfer the money from OA to SA. That is extra work! I am a lazy person!

Sammy said...

Just wondering what are the reasons for that number and that age E H?

Serendib said...

Ref P's comment on what happens when you hit the medisave ceiling - in my experience any addition sums meant to be medisave contributions are automatically transferred to the CPF-SA, not the CPF-OA. And as we all know CPF-SA funds can't be transferred to OA.

DTT said...

Hi AK, if i am not wrong, both Special Account (SA) and Medisave Account (MA) earn an extra 1% interest for the first $40k (combined balance). So from a purely interest rate perspective, there is no different whether you chose to top up your SA or your MA.

AK71 said...

Hi DTT,

I remember that the first $60K in our CPF account will get extra 1% interest. $20K in the OA and $40K in the SA. I don't think the MA is included or am I mistaken? -.-"

E H said...

Sammy, I had to do a quick one, just for you.

http://callingthetop.blogspot.sg/2015/04/40k-vs-100k.html

owq said...

"An extra 1% interest per annum will also be paid on the first $60,000 of a member's
combined balances."

From CPF FAQ.

The priority is RA, OA, SA, MA.

So if OA no money then SA and MA will get it

DTT said...

I did a check on the CPF website. Yup, MA is also eligible for the extra 1%:

http://mycpf.cpf.gov.sg/Members/Gen-Info/Int-Rates

Flyingsaucer said...

hi

30k would become 100k when we are 55 at 30 years old at 5%

50k would become 155k with 40k at 5% interest and the remaining 10k at 4% interest

that is alo pretty magical to me

AK71 said...

Hi owq,

Ah, that is very clear. Thanks very much for sharing this. :)

So, we would have to make sure our OA goes to zero and stays at zero, then, if we have $60K in the SA and MA combined, they will get 5% instead of 4% interest per annum. :)

AK71 said...

Hi Flyingsaucer,

For Singaporeans and PRs, we are pretty lucky to have a retirement funding tool like the CPF. :)

I hope that many more people will come to realise this and take full advantage of the CPF earlier on in life. Let the magic of compounding do the rest. When compared with similar tools out there, everything taken into consideration, it doesn't get much better than this. :)

imdna said...

AK what do you think of getting a few M1 now? Price has dropped quite abit although P/B is still high at 7ish and P/E 17ish. Dividend is quite attractive at 5%
Btw figures are from Bloomberg.

AK71 said...

Hi imdna,

I have not looked at M1 before. So, I am not the best guy to comment on this.

Just based on what I see in the charts, I think there could be a little bounce in price but it could drift lower.

incantations said...

Hi AK & guys,

This is P here.

After playing around with some figures on a spreadsheet, my conclusion is that amounts of 40k and above in the cpf-sa would likely result in an individual being able to hit at least the min sum as opposed to lesser amounts. This is assuming that an individual would carry on to work while drawing a modest salary which in my context I am likely to, unless something unforeseen happens. Referring to what I have said, having a sum of 40k in the SA account as early as possible would broaden the chance for a larger pool of people to hit the ms, and I think the government has done the right thing by incentivising amounts below 40k with an additional 1% interest rate.

incantations said...

Also, I have made a mistake in regards to "excess amount of medisave contribution (after hitting the MMS) flowing into the OA account". This is incorrect. As pointed out by Serendib, the amount will flow into the SA account instead. However, the plan does not change for me because this is what I am intending to do in the first place, and that is to have more monies in the SA for compounding to work. Thanks for pointing this out and I really appreciate it.

incantations said...

Also, I do not deny that a higher amount in the SA account is definitely good and not uncalled for. However, i think its also important for one to consider his needs for the use of funds. While the SA account generates a higher interest rate, however, it does not allow someone to pay for his property which at least in me and my partner's context, we have set a goal towards owning our property. 100k may be a magic number for others but not for someone like me who may not have that much to begin with. =)

imdna said...

ok thanks...

Actually wanted to get some QAF but by the time my cheque cleared, went up 3 cents...wait til XD?

AK71 said...

Hi imdna,

I like to think that there will be a chance for me to buy again at lower valuations. Otherwise, I will give it a miss. ;p

MaoMao said...

Hi AK,

I am still reluctant to the idea of transferring OA funds to SA. This is a permanent and irreversible act that locks the money in SA until 55 years old or more.

I had a good run with buying and selling blue stable chip stocks for the past 12 months. I have gained an average of 3℅ to 7% capital gain per stock after deducting the CDP fee, CPF transaction fee and the quarterly fee imposed by the CPF Agent Bank. Each capital gain (e.g. 3% to 7%) of a stock was within a short span of a few months. I feel this is much faster than the 4-5% *per annum* interest rate.

Hope someone can share some light on why 4-5% per annum risk-free is supposed to be great? Thank you.

AK71 said...

Hi MaoMao,

Simply put, there is always a place for a risk free and volatility free instrument in our financial portfolio, especially when it comes to retirement planning. :)

qook said...

Hi P, I will go against the grain here and suggest that you consider hitting the MA min sum first. I like the snowball effect of concentrating all efforts in hitting the lowest target first, then you can "snowball" the effects and use that to concentrate on the next target. In my case I have hit the MA min sum, thereafter every month the MA allocation from my monthly cpf contribution gets rolled into SA instead, effectively doubling my SA contribution rate. The interest earned from MA also goes into SA once your min sum is hit. Lastly, you can do cash top up to your SA and save tax. Using all three prongs of "attack", I find that it is very gratifying to watch my SA snowball every month :)

qook said...

Sorry small correction. Where I referred to MA min sum should be the contribution ceiling instead (now renamed as Basic Healthcare Sum). Only amounts exceeding the contribution ceiling will be transferred to SA :)

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