This post is not about investing, studying markets like them gurus, although it involves investing your CPF money, but you do not need to do anything. Or provide any money, the risks involved is only based on govt ruling.
Although as of posting HDB loan interest rates is 2.6%, I consider it to be 0.1% more than the prevailing CPF Ordinary Account (OA) interest rate (currently 2.5%).
Flat price basis $300,000.00 (before grants).
Now, I was talking to my friend about getting HDB loans vs Bank loans, given the risk averse nature between me and my future wife, we would prefer the HDB loan rates and seeing the extra paid for interest versus the bank loans to be considered as for covering the risks of the ever changing market interest rates, which we have no way of keeping abreast of as neither of us are into finance and investment related.
My goal in future is to do achieve the following:
- pay for HDB with as little interest as possible
- meeting the minimum sum so that I'll be able to withdraw my CPF money timely
- really retire and enjoy life like they show in TV shows rather than be working at an old age
Firstly, basis assumptions on only owning one flat and the interest rates on all accounts remains the same or adjusted slightly.
CPF minimum sum requirement is adjusted to be less than 4% annually.
- pay for HDB with as little interest as possible
Assuming we do not get any help from parents, although if cash rich enough, its better to owe parents money than govt bodies.
Although you can have a loan tenure of 30 years, its still not worth it considering the extra interest rates. If your house is less than $400k, we current PMET salaries, it is not that difficult to scrimp and save for 10 years to repay everything.
What about the kids? From getting flat, the kid will come about 2-3 years living in, you will only have to live frugally for 8 years of the child's life from birth. I believe, these are the times where the kid spends the least of your money compared to when we are talking about puberty clothes, increase in materialism, social events your kid goes to is on you, tertiary education, vacations will be more frequent and costly as your child ages.Now that you have taken on the life of suffer-first-enjoy-later, you still cannot give HDB every single dollar you have every month. You have to keep some for yourself in rainy days and still have a loan, so the cost for striking a balance is now transferred to your HDB loan interest rate. How much are you willing to pay to keep yourself cash rich for this period of time till you complete payments of the HDB flat.
Its not as daunting as it sounds, various things will help you get through,
Firstly is to first gather some cash aid from parents, as mentioned before, you would rather owe parents than owe bank or owe govt bodies. And also with HDB loans, you are able to make early payments and it is also some what less complicated.
Secondly, you have to set aside some cash and start early payments by 2nd year onward. The main aim is to help you minimise your money that is gone into the HDB loans and CPF and other nonsense that we do not understand like accrued interest.
- meeting the minimum sum so that I'll be able to withdraw my CPF money timely
A lot of people think that reaching the minimum sum is the end goal, but that's not it. Minimum sum is just sort of a major checkpoint in your CPF money.
However much the minimum sum is, you have to keep ahead of it as much as you can. The more you do that the more you can withdraw from your CPF accounts before the minimum sum is transferred to your Retirement Account.
The main thing you have to do is grow your CPF money to the point where at 50 years old (assuming you are working with monthly contributions) you have more money than the minimum sum. Here's how.
1) Before paying for your HDB, you take all the investible CPF money to buy some investments (more on that in future). Remaining $20k will be in your account (combine with spouse, you will have $40k). This money, will be used to pay your HDB down payments and a few early payments that you are comfortable with.
2) After that, once your HDB down payment is made, sell your whatever CPF investment and bring the money back or you could wait for it to mature if the returns is more than 2.5%
3) Now with this extra money back into your CPF, you can use your monthly CPF contributions + some of your cash to pay for the house monthly repayments. (For money completely set aside for interest rate growth, you can transfer this into your Special Account (SA), not a bad deal for risk free 4% annual interest rate.
4) with this plan, you can get quite a handsome sum due to compound interest by the time you are 50 years old.
Quick Maths for Basic 25 year old PMET; salary of $3000-$4000 per month
Sum in SA: S$27,000.00 (after this plan, this sum quite attainable at the age of 28-30)
Annual contribution: $2700 (easily attainable in by 28-30, and surely will increase, but assume $2700 for every year)
With the 4% in SA, you do not need to do anything, just your pay alone and with the magic of compound interest, you will have $184k.
This is not inclusive of your increased contribution due to pay increase, self top ups and the additional 1% for the first 50k in your combined CPF accounts.
Now assuming you keep this up for another 10 years, you will have more than $300,000!!! By working another 10 years. assuming you still have the same pay, you will gain $100k just on compounded interest. It seems magical but its not.
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.
-Albert Einstein
For this to work, you must understand that you must reduce some cash flow/get help from parents to pay up your HDB flat asap in order to reduce interest on your HDB loans as well as the confusing accrued interest.
General rule of the thumb, for your money to grow, your own money must have higher interest rates than your loans.
CPF OA - 2.5%
HDB loan - 2.6% (OA + 0.1%)
CPF SA - 4.0%
As you can see, so long your money surpasses or is equal to the prevailing minimum sum, you are able to beat any minimum sum adjustments (which is increases) with no effort on your part.
- really retire and enjoy life like they show in TV shows rather than be working at an old age
Alot of people sees the minimum sum to be the end point in accumulating money in CPF. But that should not be the case if you are earning 3-4k in your twenties, 5-7k in your thirties and so on. You should aim to have a substantial amount in your CPF above the minimum sum. That way, when the time comes, you are able to take out a bunch of money till only the minimum sum is left. This minimum sum will then go into your CPF life or whatever scheme for your retirement account.
The key indicator is find out based on your current contributions annually, how much will your end figure be at 50 years old. This should give you a good gauge of how much you need to contribute towards achieving the figure you want. Yes, use cash to top up CPF is foolish (for now), but when you are old and no energy, you definitely wished you had work harder when you were young.
Last point
This is a long windy post, perhaps the main takeaway is this, learn the formulas for loan payment and concept of compound interest. You can take your time with accrued interest concept (although this is never to your advantage since you are loaning/using money from elsewhere). For loan payment and compound interest, time is of essence. Mai tu liao. But just make sure you are very sure with what you are doing. My method may work due to my circumstances but may not work for you. So better use excel and work it out in actual dollars to put yourself in the real perspective. You maybe paying lesser now, but at the end of the day, these numbers really do add up.
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