Saturday, 19 July 2014

How I Learned to stop Worrying and love the Minimum Sum

The Fear of Death does not keep us from Dying. It only keeps us from Living.

The first time I went down a 3-storey water slide (the now defunct Big Splash*), I was very frightened halfway down and I was trying very hard to slow myself down. I pressed my legs against the sides to try to brake, to slow down, but it was too slippery. I just slid faster and faster until I hit the water.

"This is fun?" I asked myself, as I sat in waist-deep water collecting myself.

But I decided that the slide would not get the better of me, and so I went up again, and now I told myself, I would go FASTER!

So as I slid down, I willed myself to go FASTER! And to fake it, I was actually yelling "FASTER!" And suddenly the slide WAS NOT FAST ENOUGH! And I wasn't afraid.

So what has this to do with the minimum sum?

Allow an old(ish) man to ramble on...

When I still had a few more years of mortgage ("Mortgage" from "Mort" meaning "Death", and "Age" meaning Old. "Mortgage" = A debt you pay until you're dead or very old) on my HDB flat, I realise that my Ordinary Account (OA) had accumulated some funds, sufficient to pay off my mortgage. I was wondering if I should, or just leave things alone, and let the OA accumulate.

Then, I read a financial advice for an easy way to get better returns on your savings. Simply transfer your CPF money from your OA to your Special Account (SA). This raises your interest rates from 2.5% (in the OA), to 4% (in the SA).

But I have a mortgage!

And I'm paying 2.6% interest on the mortgage.

And it all became clear.

I could leave my money in the OA at 2.5% while paying off the mortgage at 2.6%. That would be stupid.

I could pay off the mortgage balance with my OA, thus removing the 2.6% debt. (Not stupid. May even be smart.)

Or, I could transfer my OA to my SA and earned 4% interest while paying off a debt at 2.6% interest. This would be the smartest move investment wise.

Which was what I did.

Over time, the 4% interest help my SA grow really really fast. Much faster than the OA (which, to be fair was being deducted for the mortgage).

Anyway, the next time I tried to transfer excess funds from my OA to my SA, I could not. I had exceeded the prevailing Minimum Sum (thanks to the 4% interest as well as continuing CPF contributions).

And even as minimum sum increased over the years, the SA balance continued to grow and exceed the minimum sum. Which means that I could not transfer more money to my SA.

So I am in the very happy position of having met my minimum sum requirement (before age 55). Which means at 55, the minimum sum would be drawn from my SA into the Retirement Account (RA), and the rest can be withdrawn, if I want to.

If I had kept my money in the OA, I may not meet the minimum sum (which may have gone up) with the SA, and then some of my OA would go into the RA. Or maybe I would have just met and I would only get to withdraw my OA only.

It's like riding the water-slide. You are going down. There is NOTHING you can do about it. If you fear the downward slide, you will realise that you have no control and things are out of your hands, and you will feel only more fear, the fear of the downward slide, and the fear from the realisation that there is NOTHING you can do about it.

BUT, if you get on the slide, understand the purpose of the slide, throw yourself (enthusiastically, or like me, faking it) into the slide, and work with the slide, you will overcome your fear.

And then, you might realise that it is actually paying off.

In my case, once I was comfortable with my mortgage payment, shifting my OA to SA is like yelling "faster". Instead of fearing the SA, I used the SA, worked with the SA, to help build up my minimum sum FASTER.

And then I met the minimum sum and more. And then, I didn't have to worry about whether I would meet the minimum sum or if some of my OA will have to go to my RA when I am 55.

Note that the above suggestion worked for me, but you have to decide if it will work for you. If you haven't bought your flat/home, you may have to consider your near-future plans. Like paying for your flat/home.

Also, have you considered NOT using your CPF to pay for your flat? Your bank pays miserably poor interest rates. CPF pays at least 2.5%. Using CPF is "painless" because it is money you cannot otherwise touch. BUT it will be painful eventually. If you can set aside 20% of your income to pay for your mortgage, your OA (don't even need to consider SA) would earn you 2.5%.

The fear of not having enough money doesn't make you rich. It may simply keep you poor.

[*Note: It was at Mitsukoshi Garden in Jurong, not Big Splash, but people remember Big Splash and not Mitsukoshi Garden, because, well, it was in JURONG! I wrote Big Splash because it was what most people would remember and know. The location was not relevant to the story, but this is just to set the record straight or at least help me keep things straight in my memory.]

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