CPF Balances Update – February 2020

It is the end of February with all mandatory contributions and cash top up in for the month.

OA to SA transfer for the month of February is also completed. SA balance currently stands at $98,250.04, slightly more than half of 2020 FRS or 54.3% of the journey.

There’s a slight change in strategy from February onwards. The COVID-19 has brought with it market opportunities with the dips it presents. As such, I have transferred all but an amount left in the OA to go towards the monthly housing loan. The cash at hand is channeled from payment of monthly housing loan towards the equities market.

I continue to top up my child’s SA for $200 monthly. SA balance currently stands at $903.75.

Inflation can only be beaten by Investing

Cash, savings account, government bonds and low interest-bearing time deposit account are not exactly good storage of value. In fact, these instruments are a sure way of losing your monetary or purchasing power over time. Inflation in essence is the cause — pure economists will relate it to the interaction of demand and supply factors in the economy to form what we know as price.

Every single one of us are affected by inflation, and first hand experience as a consumer. Why my daily coffee has risen 20 cents? A bowl of noodles now is 30 cents more expensive as compared to last year! And many more examples.

Any idea of the annual inflation rate in Singapore?

2%? 3%? For the past 5 years, annual inflation rate had been at 0.44% (2018), 0.58% (2017), -0.53% (2016), – 0.52% (2016) and 1.03% (2014). Surprised? Some would spend 5 sec to think about it: inflation is that low? Definitely manageable with the way I am managing my money now!

If we look further back, things were not always so rosy. Inflation rates were 4.58% (2012), 5.25% (2011) and 6.63% (2008) for instance. From a long-term overview, inflation rate is about 1.5% to 2.0% annually on average.

Why do we need inflation? Couldn’t the Central Body or government intervene to keep inflation as close to zero as possible? Low and stable inflation is thought to be essential for steady and sustainable economic growth year after year. High inflation is definitely not desirable; deflation is equally harmful, which we would then appreciate the logic for low inflation.

Deflation is a widespread, broad-based and sustained decline in prices for all, goods and services in the economy. This generally also means that companies and employers have less capability to pay out the same rate to employees due to decline in business and profits relating to price, which in turns leads to depressed wages and lower purchasing power for consumers.

So let’s not get too happy yet. 2% while low is still significant over the run long. At 2% inflation rate, $1 is worth $0.67 today, essentially losing 33% of its worth. You would require $1.49 for the same $1 purchasing power in 20 years time.

$1 today is worth
in X years
10 years20 years30 years
1% annual$0.91$0.82$0.74
2% annual inflation$0.82$0.67$0.55
3% annual inflation$0.74$0.55$0.41
How $1 today is worth in X number of years

To have the same $1
worth today in X years
10 years20 years30 years
1% annual$1.10$1.22$1.35
2% annual inflation$1.22$1.49$1.81
3% annual inflation$1.34$1.81$2.43
How much you need to have to have the $1 purchasing power in X number of years

In short, the longer the period of time and higher the inflation rate will ‘eat up’ the value of your money more. It is quite straightforward to see that having an savings rate return or investment return of 2% only serves to preserve your wealth. Essentially, you need to substantially aim for a return much greater than 2% to actually grow wealth.

This is not to denounce cash instruments such as savings account, government bonds and time deposits as non-practical. They are an essential part of your portfolio, both for it maintaining relatively high liquidity as well as a smaller role in preserving your wealth in a relatively risk-free manner.

Instead of falling back on lamenting about societal circumstances, economic conditions, blaming the government etc, inflation is not something which cannot be beaten as long as you start taking an increased interest in investing. Honestly, I doubt people would actually take on additional jobs for more income to ‘beat inflation’. In fact, it doesn’t actually beat inflation; your monetary value is still being eroded over time. By far, investing is the only way to beat inflation.

Investing in equities or good dividend-paying stocks over a long period is one of the many ways to stay ahead of inflation. Dividends tend to keep up with inflation as they are tangible returns paid out by companies. The less investment savvy investors could turn to index funds or even robo-advisors to avoid the stress of stock-picking the right ones.

How is your own investment portfolio keeping up with inflation?

Regular Savings Plan Update – February 2020

Monthly Allocation for 19 February 2020 as follows , with a $1000 investment amount

CounterQuantityPriceInvestment Amount
OCBC Bank (O39)9$10.960$98.64
SIA (C6L)107$8.520$911.64

Average Price of existing Portfolio counters

CounterTotal SharesAvg Price
OCBC Bank (O39)255$11.1286
SIA (C6L)511$9.1685

Inculcating transferable and manageable savings and investment habit

It is pretty interesting to note that parents who on one hand disagree on spoiling their children with a golden spoon, yet be willing to pamper them with the latest IT gadgets or wants. Some disagreements which we commonly hear are

Children should work and earn their own keep for their own university education. They should invest their own monies only after they come out to work in the society.

I am definitely of the same consensus that children should be brought up in a way that they are independent, mature and self-sustainable for themselves. As the saying goes, parents as educators should teach them how to fish, instead of plainly giving them fish. A child is highly dependent on his parents for survival till the time he finds work to feed himself. Throughout this 10-20 odd years however, parents have to have a hand in reducing their dependency on them in steps or phases.

Financial literacy and financial habits go hand in hand. FinLit is about understanding the value of time and money and the logic behind managing your own personal finance; financial habits is about inculcating frugality, thriftiness and delayed gratification.

In my opinions, parents in their strong beliefs in bring up their children well, sometimes fail to separate the needs versus wants. They are also probably more focused on goal-setting. I am more concerned however in the process of reaching those goals. Education, from my own experience, is more than just academic. Many people end up in careers far-off from what they majored in. It is more about the maturing process, getting interested in continued learning and discovery and networking with people who would be useful in their own careers in time to come.

Investing for my children is not about handing over that golden spoon. My focus is in the process of setting that very foundation from which they will take over and build on that wealth many times over.

The most common form that is passed down from one generation to the next is insurance policies. How many of us can dare say that our very own parents have walked us through the rationale on why they bought it for us or ensured the smooth transition of payer from parent to child? I have had a number of friends who started off their careers with sudden large annual premiums to take up on.

There are thus 2 things I am stressing here: inculcate good savings and investment habit and make this continued habit transferable and manageable.

The way and amount that I am currently contributing to my child’s SA is something that my child will be able to take up on when she starts working in future, and hopefully she will understand the logic and maths behind it.

$100 monthly contribution to CPF Special Account (SA)

In my call to kick-start your CPF retirement planning early, I had mentioned that I had started off my child’s SA journey early with a monthly $100 contribution. All conditions remaining status quo, interests earned is roughly 4 times that of total capital put in.

$200 monthly contribution to CPF SA

So recently in January this year, I decided to up the game to $200 monthly contribution. Though not exact, the end result will roughly be about a good $700K in 65 years time.

Future considerations: $300 and $500 monthly contribution to CPF SA

We know that a dollar today will be worth so much lesser 65 years from now. It could be possible that $500 monthly contribution be a drop in the pond. I believe that savings and investing has to keep up with the times as well; it isn’t something static, and your portfolio and life goals must be constantly reviewed taking into account multiple macro economic factors.

It boils down once again to starting early, starting right. Have you considered how big your little contributions could be in the future?