By Chai Hung Yin, The New Paper
Many couples use all of their monthly contributions to the Central Provident Fund (CPF) to finance a housing loan.
But keeping some of that CPF contribution can result in significant interest earnings. Part of it can be used for investments too.
Take financial analyst Gwen Lim.
The 30-year-old and her husband bought a $300,000 four-room build-to-order flat at Sengkang.
They took a 10-year bank loan, and they pay the entire $2,000 monthly instalment using their CPF savings.
They use cash from their income for investments to boost their savings.
Ms Lim says: “We invest in shares and a bond that gives us 6 to 7 per cent in return annually. Instead of keeping the cash in the bank account, we invest to get a higher return.”
What are other ways to grow savings?
GROWING THROUGH ORDINARY ACCOUNT (OA)
Consider a couple with a monthly repayment of $1,500 over a 25-year loan period. They pay their monthly instalment with $1,000 from their CPF savings and $500 in cash.
By doing that, they can earn $58,000 in interest by keeping the $500 every month in their CPF accounts during the loan period. The savings in the OA earns a guaranteed interest rate of 2.5 per cent a year.
GROWING THROUGH SPECIAL ACCOUNT (SA)
If you are looking for higher growth, there is the option of transferring the extra money from OA into the Special Account (SA), which earns a guaranteed interest rate of 4 per cent a year.
For example, someone who is 30 this year and has $70,000 in his OA and $25,000 in his SA decides to transfer $20,000 from his OA to his SA.
In five years, he would have earned an additional $2,361 in interest.
But the transfer is irreversible.
So make sure you have set aside enough funds for your housing obligations and other uses such as education.
But what are your options if you do not wish to make an irreversible transfer?
GROWING THROUGH INVESTMENTS
After first setting aside $20,000, you have the option of investing unused portions in the OA under the CPF Investment Scheme.
There is the option of investing up to 35 per cent and 10 per cent of the investable amount in shares and gold respectively.
The investable amount refers to your OA balance and the amount you have withdrawn from the account for investment and education.
“Investors have access to a varied range of financial instruments like shares, unit trusts, government and statutory board bonds, endowment and investment- linked insurance policies, ETFs (exchange traded fund) and gold.
“Therefore, they need to consider their risk tolerance, investment time horizon, current financial situation before deciding on an appropriate investment tool,” says DBS Bank’s head of consumer treasury and structured products, Mr Justin Chua.
A piece of advice – diversify into various asset classes and markets to achieve an overall targeted return, he adds.
Blue chip counters with a historical average annual dividend payout of 4 per cent can mean an additional 1.5 per cent payout compared to the 2.5 per cent interest in the OA account, says Mr Chua.
He adds: “Having said that, the investor would need to consider the risk-return trade-off as these returns are not guaranteed and investment in higher-risk investments requires a longer time-frame to show long-term growth.
“There will be the risk that the investor may suffer capital losses in adverse market situations (like the global financial crisis in 2008).”
The usual caveat applies when investing. Attending courses like those conducted by the SGX Academy can help you make sound investment decisions.