After working for five to ten years and saving up with your significant other, you’re finally going to get married and settle down.
The first thing that most Singaporean couples would think of is a house to call home, perhaps ideally a place that is near either side’s parents… Or maybe far away from the overly-possessive parents.
So, because you’ve worked for quite some time and all Singaporeans have to dedicate 20 percent of their monthly salary to their Central Provident Fund (CPF) accounts (refer to the infographic later in the article for the full breakdown), you’ve amassed a sizeable amount.
This amount is actually subjected to annual interest. Yes, you’ve heard that right, your CPF account actually earns interest from the government!
For the benefit of those who are not sure about the interest rates that CPF is offering for our various accounts, we can look at this simple infographic to roughly know how much interest can you expect to earn from your CPF accounts.
We will look at three simple reasons why it might not always be the best decision to pay for your house with all the money in the OAs of you and your spouse.
*We’ll be focusing on Ordinary Account and Special Account in this article because most young Singaporean couples really need to know this.
1. Your OA earns interest – a lot more than parking cash in savings accounts
While most of us would think that paying with our CPF money will be better, that might be quite the contrary.
Our CPF OA earns 2.5 percent risk-free interest per annum, without any commission fees or transaction costs like investing in any other financial vehicles.
Most of our savings accounts with any bank in Singapore would typically earn us from about 0.5 percent to two percent per annum at best.
As such, you almost always earn more interest from the money kept in your OA rather than in the bank.
Of course, there is the argument that you can’t draw out the money in OA till very much later and liquidity is something most of us would favour.
That is totally fine but if you intend to live in Singapore till your retirement and beyond, every little bit of extra money in your OA and other CPF accounts compounds over the decades.
2. You Can Invest in ETFs With Your OA Money
This brings us to the next point – you can actually invest the money in your OA, that also means the profits and losses will stay within your OA, though.
However, for those who do not have much experience in investing, using money in your OA would prove to be a lot less psychologically painful.
There are limitations to what we can invest in – we can invest in Exchange Traded Funds (ETFs), investment trusts and insurance-linked policies, such as endowment plans.
The above investment vehicles might not provide us with mind-blowing returns but could give us (especially those who do not have much or any investment experience) a sense of how investments are like.
Now, you would have noticed from the infographics earlier that only the first $20,000 in your OA is subjected to an extra one percent annual interest on top of the original 2.5 percent.
So what can you do after you’ve hit $20,000?
3. You Can Transfer OA Money to SA or MA For Higher Interest
You’ve been investing your OA money with a strategy that works for you, and there is more than $20,000 in your OA now.
Now, you can park it in your OA but bear in mind that you can transfer some to your Special Account (SA) or Medisave Account (MA), which earns you more interest (up to five percent).
Money in your SA and MA is to get you ready for retirement and pay medical bills respectively.
Your SA money can be used for retirement-related financial products while earning you good interest to get you ready for your retirement.
This might not seem very urgent for us, especially those in their 20s, 30s or even 40s – retirement is in our late 60s and most of us might be thinking if we can even live till that age!
But the last thing we want to do is to burden our loved ones with our medical and daily expenses.
Furthermore, you’ll be surprised at the compounding effect of CPF accounts over the decades.
This article highlights the benefits of paying off your housing loans with your cash savings and CPF money, rather than using only your CPF money.
1. The higher interest that we can get from our CPF OA is higher than almost all bank savings accounts in Singapore, which is more beneficial for us in the long run.
2. We can invest our OA money in ETFs, investment trusts, and insurance-linked policies but profits and losses will remain in the OA (unless you lose too much, then you will have to top it up with cash).
3. Once you hit the $20,000 limit for the extra one percent annual interest in your OA account, you can transfer some of your OA money to your SA for up to five percent annual interest.
Of course, this might not be as applicable to Singaporeans who intend to migrate and give up their citizenships.
But for those who are staying here for most, if not all of our lives, stepping back and thinking about how CPF can help us instead of complaining without even knowing the benefits, might prove to help us in our family’s future.