I'm 28. After setting aside 12 months emergency fund, do I still need to allocate money to savings? Or should I use my spare cash to invest or top up CPF? - Seedly
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Anonymous

Asked 3w ago

I'm 28. After setting aside 12 months emergency fund, do I still need to allocate money to savings? Or should I use my spare cash to invest or top up CPF?

  • Income tax 7% or 11.5% depending bonus

  • Have not hit both BHS and BRS

  • 12 mths emergency fund, do I still need to allocate money to savings?

  • Or should I use spare to invest or top up CPF or do both? How should I allocate? Is there a method to calculate?

  • If CPF, should prioritise which?

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HiHi,

It's all about the allocation of your income and the level of risks you are comfortable with (so you sleep soundly at night).

It's good to see you have accumulated 1yr's fund. But should it be more?

What's your objective in topping up your CPF? While it's always good for some to argue that it's safe/good etc, the other side is, it's pretty much locked up until 55yrs.

I believe it's clearer if you have an objective in mind (setting up goals for retirement/housing etc), then working towards it with a plan. There is no reason why you cannot simultaneously accumulate some more savings, do investments and also some top-ups of CPFs also. It all depends on your situation and the spare amount you have.

You are young, so the "runway" for planning is so much longer and you are definitely right to start thinking about this now.

I am an Independent Financial Adviser, if you like a chat over call, zoom or in person. https://woocard.me/alvinmok

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I assume that your annual salary range is from 100-120k, base on your tax bracket provided. With this salary, i will suggest that you do both investment and topup to CPF.

You will only be able to topup to SA for tax relief (you wont be able to topup much to MA since you most likely hit the contribution cap when you have bonus). Another option is to contribute 15k to SRS for deferment of taxable income after retirement age, and use SRS to invest in local market if you deem fit.​​​

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About CPF:

If you want, you can "use" CPF to reduce your income tax. Depending on how much you top up (within annual limits), you can reduce your income tax by at least $2,000?

Contribution to 3 CPF accounts is not tax-deductible, so it doesn't sound like a good option in my opinion.

If your income tax is of that bracket, chances are that you can't top up much to your Medisave (voluntary contribution is capped by annual limit minus mandatory contributions). The annual limit is around $37,740.

On the other hand, you can top up your SA via RSTU. Note the tax relief limits of $7,000 on self and another $7,000 when you top up for loved ones. Also, RSTU monies are "reserved" and are likely to never see the light of day unless they come in the form of CPF LIFE annuities.

So, gotta assess your willingness to give up on liquidity in exchange for high and risk-free interest (the only risk would be policy changes, which is not likely to happen, I hope).

About investment:

I can't advise because I'm a noob in this. I leave my investment monies to robo-advisors.​​​

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I would say you have to consider about the opportunity cost of allocating more funds into your 12 months emergency savings. In fact, it really depends on your motivation on why you are looking to accumulate more cash.

You are giving up the joy of spending money on clothes, outings, travel, or a new computer that you are yearning so long for. Unless saving money inherently bring you more happiness, there must be a greater reason as to why you need to save more money.

Perhaps, you are trying to save for a home. Maybe you are looking to plan for your marriage. You might even be planning for retirement. All of these are valid reasons to save. However, if you are saving for the sake of saving, then I have nothing to say.

Now, let's imagine that you have a goal and you are looking to maximize your returns to achieve your dream.

If your goal is to become a home owner, then topping up your CPF can be a good choice if you are looking to build up that downpayment. Besides, your OA account is generating 2.5% guaranteed return which compounds over time. In addition, voluntarily contributing cash to your CPF allows you to have a tax relief, which also mean that you can potentially reduce your taxes.

On the other hand, you can also invest your money in the markets to return a higher return. If you are not a risk adverse person, then you might be able to make more money without having your money stuck in the illiquid CPF account.

Your choices have an opportunity costs. Just make sure you are weighing the pros and cons of your choices and be sure on your objectives. Different types of goals will require different solutions and strategy.

You are not able to plan on the best solution if you don't know what your goals are. If you need to speak to a financial advisor, please don't hesitate to reach out to me.

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Yes. emergency funds are not meant to be touched until emergency. you still need some cash for everyday use.

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