Tea with EY: Make CPF a part of your child's savings plan?

EY sent me an email and said:

"I called CPF this morning to enquire on the CPF contribution for my children. I have been mooting this idea for some months already and finally decided that I'll take action soon."

In relation to this, EY has decided to share another thought provoking guest blog here:

If you have children, what would you expect their New Year resolutions to be?

Being quite a laissez faire parent, I have never nudged my children to set any New Year resolutions. 

Two weeks ago, I decided it was about time to have them commit to some goals for 2015. Among them were a few financial goals/habits.

Below are the financial resolutions my teenage boys made, or more accurately, I made for them. Oh yes, of course they agreed!

1.      Save $10 per week from the weekly allowance of $25

2.      Save at least $500 for voluntary contribution into CPF OA/SA/MA

3.      Keep an expense journal to record daily expenses

4.      Maintain a cash flow statement at the end of each month

To sweeten the deal, I have agreed to match a dollar for a dollar savings into their CPF account. So if they save $500, I will top up another $500.

Some may ask why do I want my boys to contribute to CPF when they are only turning 15 and 16 in 2015? I have two reasons for this. 

Firstly, I want them to save up and partially fund their own university education. 

Secondly, I want them to actively manage their CPF money and be exposed to more complex financial decision making but within a relatively risk-free environment.

If my boys get into university, they will have 5 to 6 years to build up their CPF OA. CPF allows members to use up to 40% of the OA savings for polytechnic/university tuition fees. 

Along the way, I will encourage them to work during their school holidays and increase their voluntary contribution to CPF. 

Hopefully, they will accumulate enough to pay school fees for 1 semester. 

After they graduate, they will to pay back their own CPF OA. 

I want them to experience some form of financial obligation when they start work so that they won’t take on debt too readily.

Once they have settled their school fees for 1 semester, they shall decide what they want to do with their CPF OA. Let it accumulate slowly to more than $20,000 and use the excess to buy stocks subsequently?  

Or transfer the OA savings into SA to take advantage of the higher interest rate? I’ll leave it to them. 

For illustration sake, I’ll show them that at 4%, $5,000 in SA at 21 years old will grow 4.8 times to almost $24,000 when they reach 65 years old. 

Hopefully, this will inspire them to grow their SA more consciously and plan for retirement adequacy earlier. 

My children’s New Year resolutions will mark the beginning of my attempt to formally introduce financial literacy at home, which happens to be one of my own New Year resolutions. 

To keep all of us on track, I have downloaded the CPF voluntary contribution form from the CPF website and shall do the inaugural contribution using my boys’ current savings within the next week or so.

That shall be a good start to a prosperous 2015 and beyond!

Remember the POSB mascot, the squirrel? 

We might see a couple of squirrels on steroids here! Good one, EY!

EY's guest blog jolted my memory and I remember I started my CPF account before I had mandatory contributions too but it was for those discounted SingTel shares. 

I am sure some of you might remember the year that happened. I still have those shares today.





Thanks, EY, for providing munching material for consideration.

Read other guest blogs EY: here.

Related post:
Financial freedom is a family affair.

The head of a typical HDB flat household speaks (Part 3).

In part 3 of our correspondence, we talked about investing in real estate for rental income:





Hi Ak

Another friend of mine (same age as me)is so concerned with unemployment before 50 yr old, that he keeps urging us to buy a condominium and then collect rental income on it. 

He already owns an apartment in KL, and claims that he is successfully collecting rent of it. But he always avoid my question when I ask about currency & political risk of owning foreign properties. 

Now he is aiming for his 2nd rental property in Singapore. He said that prices are coming down and good time to buy in 2015 or 16. But again he avoid my question when I ask him about maintenance costs affecting rental yield and the oversupply of condos/ foreign labour cut back in Singapore which makes it risky strategy.

When I suggest buying S REITS as an alternative, he said it's not worth doing it until he has a million dollar capital base.

He also say meeting minimum sum in CPF is no big deal for him..

I am highly suspicious of his recommendation.

Good if I can hear your objective view on owning a physical property vs buying REITS. 

Thank you

C

My reply:

Hi C,

Well, there will always be risks in investments. Risks cannot be avoided but they can be understood and even managed.

Your concerns with regards to buying a property overseas for rental income are valid. I hope that your friend is still doing OK with the RM's decline in value against the S$.

Anyway, is it better to buy properties than to invest in S-REITs? The topic is well discussed by many people before. Personally, I feel that both are good investments as long as the price is right. Quite simple, really.

I don't know what your friend has in mind but if it is something vague like buying properties in Singapore in 2015 or 2016 is a good idea because prices will come down, I think he needs to do a bit more research and analysis.

Personally, I feel that any property investment must be able to provide at least a gross yield of 5% to 6% to make it worthwhile. This is a primary consideration for me and I blogged about the Rule of 15 before. Then, there is a whole gamut of other considerations which I have blogged about in a piecemeal manner before too.

Ultimately, I would say to do what you feel comfortable with. There are so many paths to financial freedom. Choose a path you are not only comfortable with but one which you are sure will bring you to where you want to go. :)

Best wishes,
AK

Related posts:
1. Rule of 15.
2. Journey to financial freedom is not a race.
3. Buying a property in Iskandar, Johor.
4. Don't think and grow rich. 3 points to note.
5. The head of a typical HDB flat household speaks (2).