So, you want to be financially free too but wonder how?

This blog post is really written with one person in mind. OK, there could be others like him. So, it is written with him and his like minded buddies in mind.



On 17 May, I shared the following on my FB wall:

Someone who was introduced to my blog wrote to me to say that it is difficult to have enough savings for investment as his salary increments will at most keep pace with inflation.

Of course, I gave him the usual talk on wants and needs but he said that he couldn't reduce his expenses for various reasons. (AK doesn't really believe this but close one eye lah.)

Anyway, he felt depressed after reading my blog. Alamak!

Save 100% of your take home pay. What?

So, cannot reduce expenses, how? I asked him to read Chapter 3 of this free "e-book".

I could have just given him the link to that single relevant blog post but I want him to read these 7 chapters (i.e. blog posts) together. Yes, AK is sneaky.

Don't depend on wage increases for higher income.



Journey to financial freedom is not a race.

Yesterday, this person contacted me and said he has read the "e-book" and he thinks that people like me are just "plain super". He didn't think he would be up to the challenge. He was wondering if there were easier ways available. So, what's new? Duh.

I know that it always is the hardest at the beginning. This is true. However, it will get easier over time. This is also true. It is whether we have the courage to take the first step and the determination to continue putting one foot in front of the other. It is a journey. Nothing is going to change if we stay at the same spot, feeling too fatalistic to make the move.

Many people have told me that my blog has changed the lives of many people for the better. It is just that I don't know about them as most people are not as talkative as I am. It was only in the last 1 or 2 years that many more readers have come forward to share their personal stories of transformation with me. I am glad.

I would like to do something for this person who is still feeling depressed and others like him. I would like to share bits of several chats I had with another reader in FB in recent weeks:

From what I know, W is someone who has parents and young children to care for. I believe that his financial burden is not light but he has the courage and determination to take the necessary steps to improve his financial health with an eye on generating passive income to help supplement his earned income. 

His is a story of a hardworking ordinary Singaporean who wants and is working towards a better life for himself and his family.

Some people say that the grit that Singapore's pioneer generation had is barely visible in the Singaporeans of today.

They say that the "can do" attitude is dying. They say that Singaporeans are spoilt and have grown soft. There is some truth in all the statements but we have a choice.

We have a choice to prove them wrong.

W has made his choice.

You have to make yours.

Related posts:
1. AK's birthday wish was for everyone to be wealthier.
2. "I used to think that the PAP was eating our money."
3. Tea with Matthew Seah: POSB Invest Saver account.

Should he do a VC or a MS Top Up to his CPF?

E-mail from reader:

Hello AK,

Hope this finds you well.

Firstly, thank you for sharing your knowledge with the readers! 

Been reading up on your blog posts since last year to improve my financial literacy and I have gained a lot.





Just a short introduction, I am 20 this year awaiting for my enlistment to NS. 

I intend to settle down at the age of 28 and hence, would need to save up quite an amount to afford for the wedding and a HDB flat. 

After reading your blog, I decided to make voluntary contribution to my CPF account starting next year to prepare for a sum of money. 

For example, contributing to OA from age 21 to 28 and thereafter, contribute to the SA till I retire which I aim for it to be at 55 years old.





Can you share with me your opinion on this plan of mine as I want to cover any loopholes as much as possible in my planning. 

Also, is it possible to just make a voluntary contribution to a specific account such as OA and not to all 3 accounts? 

I tried searching for the information on the CPF website but it was quite difficult for me to navigate around it.

Thank you for taking time out to read this and I look forward to your future blog posts!
Regards,N

Money tree? I go for low hanging fruits.

My reply:

Hi N,

Welcome to my blog. :)

Using cash, you could choose to do either a MS Top Up to your SA or a VC to your OA, SA and MA. 

A MS Top Up to your SA requires more serious consideration because you won't be able to use the money for housing unlike money in the OA. 

However, it would be more rewarding with much higher interest rate of 4% to 5% if your objective is to save early for retirement. 





The magic of compounding is amazing, given more time.

However, if you are not sure and it is hard to be sure when you are only 20, it is best not to do a MS Top Up yet. 

Doing VC to all three accounts will give you more flexibility and enjoy 2.5% to 5% in interest rates at the same time. 

A percentage of the money in the OA could be used for approved investments too while money in the MA could be drawn upon in case of hospitalisation (and MA is also used to pay for our H&S insurance plan).

When you start life as a working adult a couple of years later, you might want to consider doing an OA to SA transfer. 

This will not be an out of pocket exercise. 

It is money in your CPF OA that is being moved. 





You might choose to do this for the first 3 or 4 years. 

It will give your SA a boost and the magic of compounding will do the rest for the next 30 years. 

Of course, you might have to push back your plan to settle down by 3 or 4 years, in such a case.

Think carefully your own circumstances and what you want in future. 






The CPF is a useful tool in planning for a more comfortable and secure retirement but there are competing uses for our financial resources. 

I am only sharing what has worked for me in my blog. :)

Best wishes,
AK

Note:
VC = Voluntary Contributions
MS Top Up = Minimum Sum Top Up






Related posts:
1. A lot of money in the CPF-SA...
2. How did AK amass so much money in CPF-OA?
3. Beef up to attain financial freedom sooner.

Misled into earning 6.30% interest in 4 years?

Almost a year ago, I had a blog post titled "How to earn 6.30% interest in 4 years?"

Back then, I said I found the ad objectionable because it was misleading.

Although I did not say so at that point in time, I was also wary of how interest rates were more likely to rise than not in future. This would have been abundantly clear in other blog posts I have published.

Today, a one year fixed deposit could get us as much as 1.6% per annum. A two year fixed deposit could get us 1.8% per annum.

With interest rates more likely to go up in future, a person who chose not "to earn 6.3% interest in 4 years" last year is probably going to do much better than someone who did.

Think and think again before buying products like this.

Remember, nobody cares more about our money than we do.

Related posts:
1. How to earn 6.30% interest in 4 years?
2. Nobody cares more about our money than we do.
3. Why fixed deposits and not structured deposits?

A conversation on the CPF and investing in stocks.

A conversation which I think might motivate a few others here:

Hi AK,

I have been going through your blog on max up minimum sum. I really like the idea to have govt help to build our retirement fund.

Can i seek your opinion that if my SA has not hit the minimum sum of 161k, is it better to do cash top-up (even more than 7k, no tax rebate beyond that though) to SA? Is when we hit the minimum sum, then we do VC to further build up our CPF account. Whats your view?

Thanks and regards,
G

Hi G,

If you want to give your SA a boost, I think doing the MS top-up is a good idea. You will hit the minimum sum faster and get income tax relief (up to the first $7K yearly) to boot. Of course, it really has to be money that you won't be needing for anything else. Remember that the process is irreversible.

However, if we do this yearly, we would be saving a lot in taxes and we are also very likely to receive a very meaningful lump sum payment at age 55 (with most of the money being from the government). :)

Best wishes,
AK

--

Hi AK,

So am i right to say we should only do VC after we have max up SA to MS and not before?

Thanks and regards,
G

--

Hi G,

If you want to benefit from the income tax relief, yes, that line of thought is logical. :)

However, remember that we can only do VC if our mandatory contributions do not hit the contribution cap set by the CPF Board. This cap is revised yearly. I believe it is $31,450 for 2015, for example.

Best wishes,
AK

Thanks AK for the confirmation. Your blog really change my view on CPF and how we can build our retirement fund.

In your view, do you think govt will keep increasing the minimum sum? I dont think there is issue with PMET but for those low or low-middle income earner might be tough as they might not meet the MS by the time they retire.

---

Hi G,

The minimum sum will increase yearly by about 3% to keep pace with inflation. This is a given.

The CPF is really to help the common people. You can tell this by how there is extra interest income for the first $60K in our account and how there is a limit to how much we can top up our CPF accounts. It is not meant to benefit the rich.

We need to educate those who need the CPF most for a financially more secure retirement. If lower income workers diligently top up their CPF-SA while staying financially prudent, the magic of compounding will help them have a meaningful retirement income for life. They need to start doing this as early as possible. :)

Best wishes,
AK

Hi AK,

Yes, i can appreciate after going through your blog. Thank you for the enlightenment.

I attended few of your sessions and like the way you analyse stocks. Can you share how you filter stocks, any key criteria before you put in your shortlist and start going through in details?

Thanks and regards,
G

--

Hi G,

Oh, you did? I am glad you enjoyed the sessions. :)

Well, I cannot give you a set of criteria. Like Charlie Munger would say:

"I can never make it easy by saying. ‘Here are three things’. You have to derive it yourself to ingrain it in your head for the rest of your life."

However, I would tell you my starting point. I invest mostly for income. So, whether a stock pays a dividend is an important consideration. Then, pick it up from there. If you were to invest for growth, you would have a different starting point. It is important to match our motivation and our methods. :)

I have a section in my blog's right sidebar titled "Food for Thought". You might want to read the books listed there. Good primers. :)

Best wishes,
AK

Related posts:
1. Achieving level one financial security.
2. Suddenly, financial freedom is less remote.
3. A simple way to a double digit yield.