How to upsize $100K to $225K in 20 years? Oppa AK style! (UPDATED)

People are naturally attracted by large numbers. 

I mean if we got a 5% discount off a purchase price, we might not be very impressed but if we got a 20% discount instead, then, it could have a WOW factor.

It is the same thing with wealth. We would be more impressed with wealth in the billions than wealth in the millions. 

It is only natural. 

Of course, remember to ask what is the currency it is measured in.





Even if it should be news about some loss of wealth, we would be more likely to share the news of how a widow lost S$1 million in a year than the news of how someone lost his EZ-Link card because he was too distracted while on board a crowded bus.

So, I am not surprised that when I tell young people that the CPF-SA pays 4% to 5%, risk free, they are unimpressed. 

These are the ones who would complain about how they feel that they will not be able to meet the CPF minimum sum by the time they are 55.

When I tell them that they should consider Minimum Sum Top Ups (up to a maximum of $7,000 a year) to their CPF-SA or that they should transfer their CPF-OA money to their CPF-SA, they think I am crazy, naturally. 

(AK must be a pro-government dog. Hey, I am a pig, OK?)

Hey sexy S A! Oppa AK style!

It is only when I tell them how much I have in my CPF-SA that they start to ask questions. Something along the line of:

"Wah! How do you manage to have so much in your CPF-SA? You are only in your early 40s!"

Ah, finally, I got them interested. 

That would be when I show them the numbers "10" and "50".




Unimpressed with 4%? 

Surely, 50% is more impressive. 

The funds we have in our CPF-SA will grow 50% every 10 years even if we stop contributions today. 

That is the power of compounding at 4% per annum.

Compounding grows more powerful with the passage of time.

$100,000 today grows $50,000 and becomes $150,000 ten years later. 

That $150,000 will grow not $50,000 but $75,000 in another ten years from then. 

It would become $225,000! 

So, it continues. 




Why can't we meet the minimum sum again if we do the right things?

Well, for one thing, for most people, there is too little in their CPF-SA! 

Imagine the difference between $10,000 and $100,000 compounding at 4% per annum. 

It is that simple. 




So, voluntarily pushing more money into the CPF-SA is necessary.

Start doing this as early as possible. 

The sooner we build up a strong base in our CPF-SA, the easier it is for the magic of compounding to show its power. 

Time and the government will help us grow our retirement funds in the CPF, all without any risk.

My own experience bears this out as I transferred much of my CPF-OA money into my CPF-SA in the first 4 years of my working life. 

Then, I let the magic of compounding do the rest.

This is something that anyone, especially those in their 20s, should seriously consider doing. 






It might mean putting off marriage plans by four years for some but it would be worth it.

For those in their 30s or 40s, it might mean that they have lost 10 or 20 years of compounding magic but 65 is still years away. 

So, don't envy those in their 20s (too much).





Obviously, for those in their 50s and 60s, this blog post is more of an academic exercise but I hope they will help to share the message with their children and their grandchildren, if they have any. 

The younger ones are likely to live longer and they should plan early and plan well for their retirement.

It is not impossible to meet the CPF minimum sum.

Once we know how, all that is left to do is to make the system work for us too.

Unless severely disadvantaged in some way, we can and should make the system work for us.




Related posts:
1. Build a bigger retirement fund with CPF-SA.
2. Securing risk free returns early for retirement.
3. We do better managing our savings than the CPF does.
4. Thoughts on financial security for Singaporeans.
5. Do the right things and transform our lives.
Hey, sexy S A! Oppa AK style! ;p

Buy a car and get an annuity.

I think we have read enough articles from financial bloggers on why we should not be buying cars in Singapore. 

Although I am generally in agreement, I have also said that, for some people, a car is a need and not a want. 





Generally?

Yes, if having a car would make a person economically more productive, then, the car is actually an investment similar to a capital expenditure in a business. 

Of course, add the fact that a car would probably improve our quality of life, it becomes an even more sensible proposition. (See related post #1.)

So, whether something is a need or a want depends on a person's circumstances. 

Like with many things in life, it isn't as clear cut as some people might make it out to be. 

We must not be too dogmatic about things. There will always be exceptions.





Of course, for many people, I believe, who own cars in Singapore, it is really more a want than a need. All I have is anecdotal evidence, of course. Correct me, if you like.

If we want to have a car simply because it improves our quality of life, because we don't want to squeeze ourselves into crowded trains or buses (if we are lucky enough to actually get into one during rush hours), because we don't want to join long queues for taxis when we go shopping for grocery or bulky items, because we have children and old folks at home, for examples, and if we have the resources, then, go ahead.

What do I mean by having the resources? 

Well, it could be a bit extreme but, to me, it is not just having enough money for 50% of the price tag and taking a loan for the rest. 

To me, it is about having enough money to pay for the car in full without having to take a loan. 





A car loan is actually more expensive than it seems and I have blogged about this before. (See related post #2.)

So, when a friend told me that he is thinking of taking a 60% loan to buy a car because he has enough cash to pay 40% of the asking price, I told him he shouldn't and, of course, went on to explain why. 

Then, he said that his parents are willing to give him $60K to buy the car (the car's price tag being $100K) because it is spare money to them and not making much by way of interest income but he feels bad about taking their money. 

I told him he should consider it and that surprised him.

I told him that if he has set his mind on buying a car, then, nothing anyone says is going to stop him. 




Rather than taking a loan from a bank and paying interest, he should consider taking the money from his parents and paying them interest instead. 

That way, more money stays in the family. 

Yes, take it as a loan and not a gift.

A loan to buy a car now attracts about 2.8% in interest cost per annum. 

A $60,000 loan would attract an interest payment of $1,680 a year. 

Over a 5 year period, this amounts to $8,400.




So, if he were to pay his parents on a monthly basis over a 5 year period, it would mean paying them $1,140 a month. 

In a way, it would be like a short term annuity plan for his parents too.

Mind you, I am not saying that I support my friend's decision to buy a car when he doesn't need one. 

I am just trying to make the best of a bad situation, if you will. 





The way I look at it, my suggestion would help his family save $8,400 in interest payments to an external lender. 

This is enough to pay for 56 months of petrol, assuming an average of $150 a month.

Related post:
1. Money management: Needs and wants.
2. A car loan is different from a home loan.
3. First time car buyer? Get a Mercedes Benz!
4. Tea with AK: A new car for $75,000!
5. Tea with AK: Bought a new car.