Should I top up my CPF-SA, CPF-MA or SRS account?

This blog post is inspired by a comment by a reader, Lee Jiahui, who thinks that the "SA is last priority to throw cash at", preferring to top up "self SRS or parents or children's medisave account".

To read the full comment, please go to my FB wall.

Since I always say that we should beef up our CPF-SA and do it early, what is my response to this comment?

Well, in a nutshell, what a person does would depend on his objectives.

The purpose of the CPF-SA is to fund our retirement and cannot be used for other purposes unlike the CPF-OA which although is meant to fund our retirement ultimately can be used for myriad purposes.

Keep going.

Discounting the additional 1% for the first $40K, the CPF-SA pays a 4% per annum base rate which, if given time and a boost very early on, will result in almost magical results. 

The 8th wonder of the world, remember? 

This was what I thought almost 20 years ago when I first entered the workforce as a working adult. I decided to experiment with it and regular readers know the results today.

I also like the idea of having an SRS account and contributing to it to reduce total income tax payable. 

Topping up of the CPF-MA is also a good idea since it pays 4% per annum too and get "free" H&S insurance in the process. (See related post #5 at the end of this blog.)

We can also top up the CPF-MAs of loved ones to help pay for their H&S plans.

These are all financially prudent things to do but what we do ultimately depends on our objectives.



If our objective is to speed up the creation of a retirement nest egg in a risk free manner, then, doing CPF-OA to SA funds transfer very early on in life is something we can consider.

This was what I did.

Doing MS top up to our CPF-SA will also help and this comes with the added advantage of income tax relief (for up to $7K of top up per year).

However, not everyone will have the spare cash to do this, especially early on in our careers. I know because I was in the same shoes before.



There are many things we can do to help ensure that our personal finances are healthy.

However, there are so many areas to cover in personal finance and what we do or don't do now (beyond the basics) will depend on our objectives which would probably be prioritised differently for different people, depending on our own beliefs and circumstances.





Whatever the case may be, in a world like ours, we need to have a sound long term financial plan. 

Some are lucky to have their parents plan early for them. For most of us, we have to take on this responsibility ourselves and the earlier the better.

Source: CPF Board.
Always bear in mind that there are opportunity costs.
Always bear in mind that our home is a consumption item.

Map out a path but be on the lookout constantly for a better way to travel towards our destination. 

It will be hard in the beginning. It might even be demoralising. I know. 

However, if we keep doing the right things, it will get easier with time and we will be rewarded. Believe it.

Related posts:
1. Ten questions from an undergrad.

2. If we are not rich, don't act rich.

3. Save 100% of your take home pay.
4. SRS: A brief analysis.
5. How to get free medical insurance in Singapore?

AK answers ten questions from an undergraduate.

Question and answer time:

Hi AK,
I was about to post a comment on the thread, "Want that $1m in liquid assets or $120K in passive income? Thursday 19 March 2015".

I am somewhat in a similar situation  as the person who emailed you (uni/about to graduate) and have some questions as well.

Currently I'm vested in a couple of IPOs from 2010 onwards (dad's advice) and some stocks through SCB (no min comission) but only got really active in 2014/2015. 

Building up my knowledge at the moment through borrowing / reading books and the internet.

1. You seem to be skilled in both FA and TA from your 2010 posts as well as book recommendations and current posts using Chartnexus, and advocate learning both. Would I be on the right track in learning FA to sieve out companies and TA to pick a correct entry point?

AK: I am probably semi-skilled but, yes, I think we should know both fundamental analysis and technical analysis. 

Fundamental analysis (both quantitative and qualitative) tells us the track record, health and prospects of a business while technical analysis provides us a window into Mr. Market's emotions which might give us clues as to when might be a better time to buy (or sell).





2. Do you do any trading currently or in the past and what is your take on trading? Considering advocating a certain % of my portfolio to it. Not sure if it's the right move. Say 5-10%.

AK: I do a bit of trading and make some good money from time to time when I see what I feel is a good set up. 

So, it is not about allocating a percentage of my resources to trading. It is about whether there is a good set up. 

I will say that a good trader must know technical analysis. There are many tools in technical analysis. 

Each of us will have to choose the tools that we are best at interpreting with a high level of confidence. 

Only time will tell which combination of tools works best for us.

3. With so much knowledge out there, it can get confusing what path to take sometimes. For example picking individual stocks vs etf indexing your portfolio (random walk down wall street, EMH) vs a permanent portfolio weighted by certain % (equities, bonds, gold, cash) vs trading vs a myriad of other strategies and derivatives. Would you have any advise for this?

AK: What I will tell you to do is to explore all the options and then ask yourself if the options will meet your objectives. 

Choose the one that meets your objectives best. 

Which method we choose must match our motivations. It is about choosing the right tool for the job we want to have done. 

I have my own way and I am careful to say that it is never my way or the highway.

4. With regards to CPF, I'm also wondering whether I should do full 100% transfer from CPF-OA to SA in the first few months/years of working life to allow 4/5% risk free interest rate compounding to work it's magic. I have no education/housing debt in the near future. However I understand that cash in SA wouldn't be able to buy shares except for STI ETF's and Bond Index, is that a relevant point? As I wouldn't have a potential "warchest" to scoop up deals when times are bad.

AK: The CPF is a risk free and volatility free instrument available only to Singaporeans and Singapore PRs. If we can, we should take full advantage of it. 

Money in the CPF-SA earns 4% to 5% per annum but the downside is that it is not near money. 

I decided very early on that I wanted something that I didn't have to worry about monitoring which would give me a meaningful nest egg. 

The CPF-SA was an obvious choice for me. It is a low hanging fruit which I decided to pick very early on. 

If all my investments should go awry, I would still have my CPF savings. 

I used cash on hand to invest in stocks and used some of the funds in my CPF-OA for investments for the first time during the GFC.

5. The irreversible part of transferring is also an issue to me. Thus would it be prudent to transfer a certain % out instead? Say 50%. Or whatever I feel comfortable with. Open to ideas.

AK: Oh, for sure, whatever you do, you have to feel comfortable with the decision. What I am comfortable with, you might not feel the same. 

However, if you have read my blogs where I shared how much I have in my CPF-SA and CPF-OA today, bearing in mind that I transferred all the funds in my OA to the SA very early on as a working adult, it is possible to beef up our SA and yet have substantial savings in our OA by a certain age. 

It is about delaying plans to buy a home by a few years.

It is about a willingness to downsize and locking in capital gains if the opportunity presents itself. 

It is about being prudent in personal finance always so that we have an option not to drain our CPF savings dry.

6. Lastly, i'm also looking at insurance. Correct me if I'm wrong but I believe you are an advocate of BTIR? I do know you had some non-term plans from a long time ago from your blog posts. I am considering BTIR, but also considering term vs whole life (premium paid to certain age and insured for life) as I'm wondering whether having the insurance over my entire life is worth the extra premium paid.

AK: If I had known the things I know now when I was much younger, I would not have bought any whole life or endowment plans. 

Of course, there is no way to know whether a much younger AK would have been a prudent investor or if he might lose all the savings from buying term instead. 

Anyway, now, I believe that we do not need a whole life policy (for examples, till 85 or 100 years old) unless we have dependents in our old age. 

Buying term life till age of 55, for example, makes better sense and we are more likely than not to save a bundle of money. 

(At 55, if we have been conscientious in our efforts to meet and exceed the minimum sum, we would probably be collecting a tidy sum from our CPF accounts then.)

7.What are your takes on the SAF Group Term Life Insurance Policy as well? Is it worth keeping? $12.80/month for 100k coverage.

If it is worth keeping, could I just upgrade the plan to have a higher premium and thus higher coverage, which you mentioned 500k, thus that would be my term insurance part settled? I understand 500k is just a rough guide and should be individualised.
http://singaporeanstocksinvestor.blogspot.sg/2014/08/how-much-term-life-insurance-should.html

AK: I think that is a value for money Term Life Insurance. 

How much insurance do you need? 

It depends on how important you are financially. 

Do you have dependents? How many are there? How much money from you goes to supporting them? What if you were to suffer from permanent disability and not death? 

These are some questions you have to consider when buying a term life policy. You might want to read:  http://singaporeanstocksinvestor.blogspot.sg/2014/09/term-life-insurance-why-buy-term-how.html

8. I do also already have a private H&S plan, would be waiting for Medishield Life and the relevant changes by MOH.

AK: Your private H&S is an integrated shield plan. 

You don't have to do anything because Medishield Life will form the foundation of your private H&S plan.

9. I'm also wondering what other steps should I take on my financial journey.

AK: Well, always start with the basics. 

a) Make sure that you are always prudent with your personal finance matters. 

b) Get the necessary insurance coverage but don't overpay. 

c) Know what are needs and wants. Delay gratification. 

d) Go for low hanging fruits. 

e) Invest in income producing assets to supplement your earned income. 

f) Be an opportunist and buy more when assets are on sale. 

g) To do that, have a war chest ready always. 

10. Also you mentioned "You probably read my blog posts on what fresh grads should think of doing first to help towards a financially secure future. Must always get the basics right first."

May I enquire which are the blog posts you are referring to? Would love to read the related posts for fresh grads/young adults.

AK: I have thousands of blogs by now and it is quite hard for me to track down specific blogs. 

From time to time, I unearth useful old blogs. 

I think if you were to do a search in my blog, you might find some of the blogs which might be useful to you. 

Many are already found in the right side bar of my blog. 





Hope you could help a young Singaporean adult in a small way.

Thank you very much AK, your blog has been an inspiration and the frankness of the content is great.

Sorry for the very very lengthy email.

Kind Regards,
DJ

Related post:
Read 9 wealth building blog posts.

What should I study to become a good investor?

There are a few times in our lives when we have to make big decisions and they could be easier for some than others but I don't think they are easy, by any measure.

AK talks to "himself" here.





----------------------------------


Reader says...

I'm AK too! I would like your advice for my course of studies.

I'm interested in investing. However should I take a degree in Business (in NBS ) to learn investing?

And would an engineering degree put me at a disadvantage due to not being able to learn accounting and economics?

I ask my father and friends and they all gave very different answer. I hope you can help me! Thank you.

P.S. I really enjoy reading your blog and find that many of your habits are worth following. Whenever I get home I always look foward to reading your posts be it where you eat and how much you save. 

AK says...

Alamak! You are asking an Arts grad whether you should study business or engineering? 

I have no clue! 

OK, end of reply. LOL.

I will say to go with your heart. Do what you want to do. 




I decided to do what I wanted to do too when trying to decide which degree to go for. 

If I had been a bit more practical in my choice, I would probably be making more money now but would I be happier? 

I don't know, really.

I did a part time diploma in business later. 




It was a bit demanding because the twice weekly classes were from 7pm to 10pm and the course went on for almost 2 years. 

It does show that if we want to study business or accounting later on, we can always do so as a mature student.

Enjoy your studies and whatever you do, as long as your are prudent in your personal finances and if you invest to supplement your earned income, in my eyes, you are on the right track. :)





Related posts (maybe):
1. A letter from a fresh grad.
2. A reader in his early 20s.
3. Take steps towards financial security.
4. The Millionaire Next Door.
5. How to be "One Up On Wall Street?"

A dollar saved is a dollar earned.

I was chatting with a fellow blogger recently on FB and he says he enjoys saving $1 coins:

Photo shared by the reader.

And I told him I do too. So, here are never seen before images of AK's pouch of $1 coins (and I only keep the old ones which I like more than the new ones):

Saving is a habit. No matter how little we save. If we do it regularly, it does add up.

"A journey of a thousand miles begins with a single step." - Lao Tzu.

Some friends were surprised at what I would do to save $1 before: Queue for S$1.00 parking fee redemption?

Remember what is the very first step to becoming richer? Clue.

Related post:
If we are not rich, don't act rich.
"I cannot save money because I don't make much."

Get income from investments to meet interest payments?

I remember when I paid off my housing loan many years ago, the interest rate that the loan attracted was 5.1%. That was pretty pricey. For a few years now, interest rates have been very low and, so, it has been pretty cheap for people to borrow money to help pay for their homes.

Personally, I am holding back from doing partial or full capital repayment on my current home loan because even with the sharp increase in the 3 months SIBOR in recent months, the effective interest rate on my home loan is still below 1.8%. The cost of having liquidity is not exhorbitant (yet).

Even if my investments are only able to generate a dividend yield of 4.0%, financially, I would still do OK. So, arbitrarily, an interest rate of 4% on my home loan could be the tipping point for me to want to pay it down at a faster clip.

Hi AK

I have been following your blog for about 4 months now and was rather impress with what you have.

I am in my early 40s and had just got a BTO which will be ready in 3 yrs time. When the house comes i will be down in loan by S$350k. Now i am with only S$50k in HDB Bank Loan with DBS Bank serving an interest of 1.6%. What i noticed is that out of my annual contribution to the Loan installment, about 60% will goes to the interest payment and only about 40% is paying up on my actual premium. That is alarming to me.

I had wanted to get a dividend income just like you, but if i were to have S$50k on hand, should i be paying up my loan or putting them into the dividend paying stock that gives about 6% return? Of course dividend stocks comes with value appreciation but no matter how we should not be thinking about stock price appreciation when talking about income generation.

One is for future payment and the other is for near term paying out of the housing loan. It seems that paying up on housing loan is the priority.

The next question for you is given two stock, A and B, A gives dividend yield of 6% and share price appreciation of about 4% and B gives Dividend yield of only 3% but has a share price appreciation of 10%, which would you consider for long term income?

Any advice from you will be most helpful.

Regards

M

Reply from AK:

Hi M,

A housing loan is amortising in nature. As we pay down the loan, the interest portion will shrink and the principal repayment portion will grow even as the monthly installment stays the same. If you would like to pay less interest, one way is to shorten the loan period. Then, you would be paying more of the principal amount monthly. However, your monthly installments would also be bigger, of course.

As for whether you should pay off the housing loan first or invest for higher returns, it depends on what is the interest payment on your housing loan and what you are able to get from your investments.

Imagine that you have a housing loan of $300,000 and that the interest rate is 2%. Let us assume that the loan is non-amortising for the sake of illustration. In a year, you would have to pay $6,000 in interest payment. If you were able to generate a 5% return through investments that year, you would make $15,000 which is more than enough to cover the interest payment.

Of course, there are good things to be said about paying down our housing loans ASAP no matter the interest rates or potential investment returns. Do what gives you peace of mind. That is priceless.

Now, as for stocks A and B, not an easy question because there could be so many different circumstances surrounding them. I would, however, first ask if the dividend is sustainable, if it is sustainable and if we are after passive income, I would go for stock A.

Price is, after all, often a function of Mr. Market's moods while there could be some certainty in dividend payments if they are sustainable. Like I said, bear in mind that this is actually a very simplified approach to a possibly very difficult question.

Best wishes,
AK

Related posts:
1. A car loan is different from a home loan.
2. A new flat on the way and $200K in spare cash?
3. Newly married and planning for a child?
4. Interest rate on home loan jumped 15.84%!
5. POSB HDB Loan: Peace of mind (for 8 years).

Tea with Solace: A review of Dividend Machines.

The following is a voluntary review by a guest blogger, Solace, who signed up for the income investing course, Dividend Machines.

Solace says:

Disclaimer : I am not paid or given free access to the course materials to do this review. Solace has paid $XXX USD like everybody else to take a look at the course content. These are my personal views and readers should make their decision on whether the online course is value for money.

The online course has 4 Modules:

- Personal Finance (Covers the mindset, psychology and own personal financial situation.

- Dividend Machines (Covers 8 checklists/steps in screening for dividends stock)

- REITs (All about REITs, business, valuation, financial, management etc)

- Portfolio Management

In addition, there are also:

1. Video lessons

Where they do in depth case studies and how to screen for stocks based on their methodology.

Video Lessons will commence from 25 March 2015, Wednesday onwards.

2. Q & A session

You can post your question in this segment. The Trainers have been rather prompt in answering your queries. All questions are usually answered within 24 -48 hours from observation.

Website: Dividend Machines.

I leave it readers to read more about it.

Who is the course suitable for?

In short, this course is excellent for all who are looking for insight and a consistent method to screen for dividend stocks.

This is especially so for beginners who are still trying to find their way. Even for seasoned investors, time to time we might need to defrag all knowledge we have in our mind and this course helps to do that. It helps to streamline our thought process.

While many of the fundamental concepts are not new to me, I still look forward to the case studies where I can exercise my brains to practice analyzing. I am also attracted to the Q&A section where there will be interesting discussion with fellow investors and trainers.

In my interactions with many people who are starting out with investment, I would recommend them to read different kinds of investment books. This has worked extremely well for me. However, there are people who have difficulties digesting the content inside the book and find it hard to apply them. Another group might be overloaded with many schools of thought and do not know which methods work best for them.

This particular group will always wonder: 

"What is the essence of investing? Is there an easy method which I can follow?”

What the Fifth Person has done is basically summarize the key points and presented them in a very clear, easy to understand and easy to follow manner. And there we have it, the very “essence” to dividends investing.

If you can follow the method well and are able to identify a good dividend stock that will serve you well for many years, then, paying a course fee of $XXX USD would well turn out to be a “multibagger investment” for you.

There is still slightly more than a day to sign up for the course and have a workshop session thrown in for free. Please go to the related post below for the link to sign up for the course.

Dividend Machines by The Fifth Person

Related post:
Listen to AK and create your own Dividend Machines.

Want that $1m in liquid assets or $120K in passive income?

I am very happy to receive emails from readers of all ages but I am especially happy to receive emails from young people who are just getting ready to join the workforce. 

Why?

I always say that we should plan for retirement early. 

Don't wait till we are in our 30s or 40s because we think we are still young in our 20s. 

This belief in planning early is clearly seen in many of my blog posts.






I have also shared my own experience, including some very personal financial numbers, as well as what I did to get to where I am today. 

Some readers are amazed by how simple it sounds but, of course, it isn't as easy to execute. 

Definitely, there is also always an element of luck.

Everyone's experience is going to be different and the paths we take very likely will not be the same. 

It is not about having $1 million by a certain age. 

Definitely, it is not about having $120K in passive income by a certain age either. 

It is about having a better life no matter what our age may be.






Be inspired to take action.

Be inspired to have a better life.

This is what my blog tries to do, to inspire.

Hi AK,

I happened to stumble on your blog when I was researching on the topic of financial planning. And i must say that it was a valuable find.

Anyway, I would like to ask you a question and seek your guidance in it.

I am currently studying uni and about to graduate. Hence, I'm starting to think and plan for my finances so that i'm better prepared in the future.

I understand that I have to save up an emergency fund first, before starting to invest the rest.

This is where my question comes in. Given my low initial capital (i'm expecting about $500-$1k a month of free cash flow that i can invest in the near future), how do i go about investing for a start?

Since transaction fees are really expensive (min of $25), do i put my money in those regular share plans that buy into STI ETF where the transaction cost is 1%? 

Or do i buy single shares/REITs/etc to build up a dividend paying portfolio? 

And even if i do buy singly, do i accumulate them for one company first since I'm only investing a small sum at any one time?

Hope my question isn't too confusing, i tend to be a little long winded :p

Thank you.

AT

Hi AT,

Welcome to my blog. :)

You probably read my blog posts on what fresh grads should think of doing first to help towards a financially secure future. 

Must always get the basics right first.

The next step which is what you are thinking of now is to invest and secure a second stream of income. 






Of course, there is another school of thought which is to grow wealth through investing in growth stocks. I am not dogmatic. They are both good ideas. In fact, why not do both? ;)

If your monthly free cash flow is $500 to $1000 and you would like to get into the thick of things right away, then, buying into an ETF is a good idea. 

Look for the guest blogs by Matthew Seah on the offers by POSB and OCBC in my blog. He did good write ups on these.

You could also choose to build up a war chest and buy stocks when Mr. Market goes into a depression. 







Need to be a disciplined saver and need to have patience. 

Of course, you need to have the courage to bite when almost everyone is feeling depressed too.

There is no hurry. Take your time to find out what you are more comfortable with. 

Self-knowledge and peace of mind are priceless. :)

Best wishes,
AK

Related posts:
1. Retirement (funding) adequacy.
2. Dollar cost averaging and expected returns.
3. How to recession proof your life?

Voted for WP but will vote for PAP in the next election. (Changes to the CPF system are reasonable and necessary.)

AK is a pragmatist.

AK does not believe in being overly optimistic or pessimistic.

AK is non-partisan.

AK gives credit where credit is due.







AK is not a PAP supporter hor.

AK just thinks that the PAP government is doing mostly the right things when it comes to the CPF.

I know what people say about the shifting of goal posts but if the initial measurements were off the mark (and are no longer effective today), the goal posts must be shifted. 

It is about staying relevant.

I always say if changes are reasonable, I will accept them.

The changes made to the CPF system over the years have been reasonable and also necessary.

Related posts:
1. A lot of the money in my CPF-SA is...
2. Achieving Level 1 financial security.
3. Proposed changes to the CPF system.

Did AK smoke and drink his way to greater wealth?

I must absolutely share this exchange I had with P on Facebook. Remember P, a reader who asked for my bio? We have become fast chatting buddies and this was a revelation:

For those of you who have heard me either in the podcast or in person or both, did I sound like a smoker and a drinker? I didn't know that I sounded like one.

If you have not heard the podcast yet, there is a link to the interview in related post number 1. Let me know what you think.

I am curious as to whether there is a general consensus that I sounded like a smoker and a drinker. Humour me, please.

Finally, always avoid wealth destruction. Smoking and drinking destroy wealth now and in the future. Do you believe this?

Related posts:
1. Listen to AK and create your own Dividend Machines.
2. Who is AK? Really, who is he?

AK was bullied and deprived of his mee pok dry.

Just now, for dinner, I decided to go get my favourite mee pok dry from a nearby kopitiam. 

There were two car parking lots left when I got there. 

A big BMW was before me and reversed into one of the lots.

So lucky to have one lot left for me, I thought.






When the BMW came to a stop, I saw that it was encroaching on the empty lot. 

As the well-dressed driver got out of the car with his equally well-dressed lady friend, I lowered my window and asked if they could center their car so that I could park in the neighbouring lot.

What happened next stumped me.






The woman looked at my car and said in a voice loud enough for me to hear, 

"His car so small. I am sure can fit. We no need to shift."

Then, they turned their backs on me and walked away.

OMG! 

They didn't even bother to talk to me!






I was speechless. 

I realised I was just bullied and didn't know how to respond.

Anyway, I was upset enough that I lost my appetite and decided to come home without satisfying my craving for mee pok dry.

Just now, I felt hungry and I cooked this for a late dinner:

Should I get a bigger car so that something like this does not happen again?

New material from my FB wall (11AM, 16 March 2015):

Latest update on my FB wall (4.20pm, 16 March 2015):

No problem with parking this time but this?

This is depressing.




Unrelated post:
Forced selling due to financial hardship.
(Why am I sharing this post? I have no idea.)

A letter: One year after following AK's "recommendations".

There are lessons to be learnt in this email to AK. What are they?

Dear Mr. AK,

I am 41 years old and I am new to investing in stocks. I started last year only.

There is a lot to learn but I really want to put my savings to work. The interest from the banks is too little. I am not greedy. I only want more than what the banks give. So, a colleague told me to read your blog. He said you make a lot of money from stocks.

Maybe, I am lucky. I read an article you wrote about investing money for your father. You listed 5 stocks. So, I took some of my savings and just bought those 5 stocks you recommended. 

It is now almost one year and I am very happy I followed you. I have 10 lots of Sabana Reit, 15 lots of Neratel, 10 lots of Croesus, 3 lots of SPH and 30 lots of Hock Lian Seng. I received $3,427 so far in dividends and I know there will be more very soon. I put in about $51K in total and in one year, I got 6.7% back!

Sabana and Neratel prices have dropped. I know you don't like Sabana now. I think I want to buy more Neratel. SPH price no change. Croesus price up. Hock Lian Seng price up a lot! In total, my investments value up 4.1%. I am happy about this too.

Thank you for helping me start. Although you might not know it, you are helping many beginners like me. I will tell more people about your blog. So, please keep blogging.

Sincerely,
AH

Dear AH,

Welcome to my blog. :)

Thank you very much for letting me know. However, I want to say that all the credit is yours and yours alone. You made the decision to buy and in the proportions that you did. More importantly, you made the decision to invest for income and not to leave all your money in a savings account. 

I didn't do anything and I definitely did not recommend anything. I was just talking to myself.

I hope you will learn much more on your journey as an investor and, as you do, please feel free to share with us your findings. I definitely do not know everything there is to know and look forward to hearing from you again in future.

Best wishes,
AK

Related posts:
1. Helping our parents invest their money.
2. Listen to AK and create Dividend Machines.