What is a Bad Mood Fund and how can it help us as part of financial planning? How should I manage my money as a young working adult in Singapore?

Find out more from Chuin Ting Weber, CEO & CIO of MoneyOwl, as she dishes out tips on how young Singaporeans can balance between enjoying the present and planning for their financial future.

You may check out the podcast here! Otherwise, we’ve done a quick summary below.

How Should Young Working Persons Plan Given That Retirement Is Far Away?

Q: How can a young working Singaporean maximize their paycheck and plan for the financial future especially when they started off with pretty low income and retirement is very far away for them?

When you’re young, retirement seems like something that you don’t need to think about, and you have so many things you want to try and do. When you’re young, the world is your oyster and you have dreams.

Whatever it is, I think everyone needs to start planning his or her financial foundations to start to build these foundations to give yourself options for what you might set your heart on to do. Getting married, buying your house or just taking some time off to do charity work, for example, and you also need to guard against any unexpected curveballs that life might throw you.

3 things suggested for young working Singaporeans:

  1. First, get into good financial health and concentrate primarily on saving.
  2. Get adequate protection.
  3. To learn all you can about managing your money and investing.

1. Getting Into Good Financial Health

First things first, physical health. Good financial health is a necessary foundation before you can run a marathon you need to get into basic good health and good shape. Similarly, before investing, you need to have a good financial foundation.

What would a good financial foundation mean?

A good financial foundation or good financial health begins with good habits just like physical health. So, you should build up a strong stream of income and savings.

Many people, both young and old, only save their pay when there’s anything left over after spending. It is better to practice something different, which is instead of paying bills first – you pay yourself first.

That means from income, you first save an amount and then you spend the rest.

Get this sequence right and you will be forming a very good financial habit that can build this foundation. The priority from this is to save for a rainy-day fund of at least 6 months’ worth of your expenses – the emergency fund.

What is the use of this emergency fund?

This is in case if you are suddenly out of job or something unexpected happened, you can cover your living expenses for at least six months which will give you that peace of mind. The other part about having good financial health is not to over-extent yourself in terms of loan or debt.

2. Getting Adequate Protection

Last night, I just read a quote from Jack Ma. That said, no one ever got bankrupt from buying insurance, but people did get bankrupt from not buying insurance because of the things that happened to you.

But you need to understand that insurance is mainly about protection and therefore you should get the right type of insurance. There many things that seem that you need to protect against but in life insurance, there are broadly 2 things.

  • One is large medical bills and;
  • Second is the loss of income

At MoneyOwl, we are a strong advocate of low-cost term insurance. For most people, term insurance suffices and is the best way to buy all the protection you need while paying as little as you can. It is quite a big topic, but I think for a young person, the great thing is that insurance can be very affordable.

We have a Young Working Adults Bundle, which encompasses:

  1. Shield Plan – covers hospitalisation bills
  2. Critical illness cover
  3. Monthly disability income plan – that pays about S$3000/month if you can’t work
  4. Term life insurance – Coverage of about S$1 million for less than S$140/month for 25-year-old.

So, it’s really very affordable because insurance is cheap when you are young.

3. Building Your Financial Knowledge

You may not be ready to invest yet, maybe you have some shorter-term goals or you need to concentrate on saving or some other priorities.

But you should always build up your knowledge so that when you’re ready you can do it right without getting confused about all the information on there. And if somebody tries to sell you something you know how to think about it.

How Do I Apportion My Salary?

Q: Young people have quite a number of things to consider – whether it’s a protection, savings or even paying back debts (i.e. study loans).

Is there a golden ratio that we can apportion to?

For example, a young-working adult with S$2,500 take-home pay. How can they actually apportion it to cover all these buckets?

On Savings – For Your Emergency Fund

This is more of an art than a science. At MoneyOwl, we do have some financial health indicators or ratios which serve as handles, so we were just talking about paying ourselves first. So out of your total income, I suggest you save for 15% of your total income, above 20% would be best but as the first thing that you should do when you get your salary every month.

But for some reason you can’t save 15%, you need to relook on your budget. You can either increase or income, which is not so easy to do in the short term, or you can decrease your expenses – which you probably can control it better.

Now, from this 15 or 20%, you save every month to build the emergency fund of 6 months first and then get the basic insurance that we talk about. Then, look at your debt to see if they’re healthy levels.

On Debt – Including Credit Cards

Your total debt should be below 40% of your total income. So that includes mortgage debts as well as other kinds of debts (i.e. car loans etc.). But your non-mortgage debt, which is usually to finance spending and discretionary expenses should be below 15% of your take-home pay.

Basically, from your savings to after building up the emergency fund and getting the basic insurance, to try to pay down some of these. So that you are at a healthy level to be able to run the marathon, in case anything happens.

The Bad Mood Fund

At MoneyOwl, we also advocate something called the ‘Bad Mood Fund’.

It’s a concept that says that you should put aside maybe S$20/month (or whatever amount) so that on the day your boss is being unreasonable or you’ve quarrelled with your friend, or you just feel out of sorts, you take out this fund from the drawer and you spend it.

Pamper yourself a bit – like retail therapy. Spend on something that makes you feel happy without any guilt. The purpose of it is like a control safety valve to allow you to indulge when you need it without having to worry too much.

This has been incorporated into our actual financial plan as we encourage people to give themselves permission to spend. Life is not just about you know planning for the future is also about today and enjoying the present.

How Should I View CPF?

Q: MoneyOwl integrates CPF and other national schemes when delivering financial advice. From your perspective, how can Singaporeans view this CPF portion of their savings?

When I first started working, I felt that CPF was a bit of a bother as I would rather have that couple of extra S$100 to spend. But I’m grateful for the forced-savings precisely because it’s so easy for us just to spend those extra hundreds of dollars.

Employers’ Contribution

Of course, besides our own contribution, our employers also contribute another 17% and on top of that, CPF Board pays very good interest at virtually no risk. I think it is important for Singaporeans both young and old, to understand that CPF is the foundation of our retirement ecosystem for Singaporeans and must be properly analysed and incorporated into any retirement plan.

CPF Is Meant For Retirement

CPF is meant primarily for our own retirement and its main role is to provide us with this reliable retirement basic income in our golden years and the nest egg that will fund that.

At the same time, however, as you mentioned CPF can also be used for a few other purposes,

  • To cover for medical expenses with MediSave
  • Housing payments from CPF Ordinary Account (OA) and;
  • Investing part of your CPF OA and Special Account (SA).

All in, I would characterise CPF as being there to build a long-term asset. Be it, in your account or sort of in your house because of the purpose of long-term assets is really to allow you to retire you should be prudent in the use of CPF.

Being Prudent In The Use Of CPF

  • Don’t invest your CPF Special Account (SA) savings
  • Don’t overextend yourself with property

a. Don’t invest your CPF SA savings

You get up to 5% interest on it which is very good – risk-free, beats inflation and there’s really no need to try to risk it or anything else.

b. Don’t overextend yourself with property

Don’t overextend yourself and buy too big or too expensive a property. You can consider using part cash for your monthly housing payments because you always pay off loans using the lowest interest-bearing account first. Your ordinary account is 2.5% to 3.5% which is much higher than what you get from cash savings rate.

If your cash flow allows, use part-cash to pay your housing loan. Keeping some money in your CPF OA is a good idea because it gives you some flexibility. If for some reason cash becomes precious and you need to pay your mortgage now.

I have personally benefited from this about 10 years ago, my husband and I took a year off work. Our HDB flat instalments for that whole year were more than comfortably covered by our CPF OA savings because we had some positive balance and we weren’t over-extended so that gave us quite peace of mind and could enjoy our year-off properly.

Therefore, for CPF OA, if you have saved some money there, there is some flexibility.

Overall, be prudent, don’t invest your CPF SA savings and don’t overextend yourself when it comes to property. These are the two parts about how one can operationalize this part of handling CPF prudently.

Should I Top Up My CPF?

Q: There are some talks about topping up CPF for Singaporeans. For young adults because I understand their priority is still on savings, insurance – protecting themselves.

How would one know that they’re ready to build their CPF forward?

CPF offers very good interest rates about up to 4 or 5% risk-free and when this is compounded, it can really help to grow one’s nest egg.

And in fact, many of MoneyOwl’s savviest clients, around 40 or 50 years old always ask, “how do you hack CPF?”, “how do you maximize your interest?”

In principle, topping up CPF is a very good investment and this should apply for everyone. However, for young Singaporeans, I would argue that realistically speaking they’re unlikely to have enough or be motivated to top-up their CPF.

Is Topping Up Your CPF For You?

And for practical reasons, young people, who have not yet gotten married or bought a house, would need enough liquidity for their property purchase. Now, this is likely to raise a short-term goal of under 5 years, so I just suggest that if you’re in this situation you should probably neither risk these funds and investments because markets to go up and down nor really transfer them and lock them up in your CPF SA yet. It’s probably more practical for you to save most of it in low-risk deposits (i.e. Singapore savings bonds). But after you have done your house, your down payment, you save more of what you think you need then I think if your cash flow allows and provided you’re financially healthy, one possible suggestion is to put part of your annual bonus about 10% towards topping up your CPF SA.

You can also if it’s saving towards a house payment, you gotten most of it in cash for the last 10 or 20% maybe consider a voluntary contribution that flows into all 3 accounts so that it includes part of the OA as well and you can also sort of save part of your housing through your OA. But it really depends on how liquid or flexible you want it to be.

What About Giving To My Parents?

Q: What about…for young people another thing that is at the top of their mind is to give back to families, their parents, how would you actually advise them – allocate that in their own budgeting?

I guess it’s very specific to each family and their relationships and it depends on how well off your parents are.

I would say that so barring those specific considerations is a good thing, and in line with our Asian values to contribute to our parents, there’re several ways they can do it.

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Giving To Your Parents By Topping Up Their CPF

I have a colleague who actually gives her parents money every month but not as cash but by topping up as CPF because her parents are still working and they don’t actually need cash right now. This builds up their CPF and through the compound interest, it builds up the nest egg they can have which will then translate to higher CPF Life when they’re retired.

So I thought it was a good idea and she gets a tax exemption on those contributions to her parents so that’s good.

Ensuring Your Parents Are Adequately Insured

The other part is sometimes neglected is to ensure that your parents actually have adequate insurance coverage especially medical coverage – the good thing now is that we have MediShield Life.

So most people are covered but if your healthcare expectation or your parents’ healthcare expectation is higher you might wish to look at ensuring that is taken care of as well. And with CareShield Life coming on board there’s also the option of helping your parents to transit into CareShield Life if they are eligible.

If the parents are still insurable actually that’s one of the best things you can probably do not just with them but for yourself. Besides the cash that they can have, but if they don’t really need the cash right now, you can consider some of these things or even use CPF interest rate to build their retirement income rather than just give them cash in and then put in the bank.

Some Final Suggestions For Millennials?

Q: Are there any other last words or final advice you have for our listeners?

I’d like to suggest or encourage all of us to think of financial planning as something that supports our life goals rather than a set of financial numbers to reach. Money is important but it’s only an enabler at the end of the day.

So if you seek to maximise this, we actually fall into all kinds of traps or chasing the latest investment fads, timing the market, investing your CPF Special Account – things that actually create a lot of stress and usually in regret.

But if you can think of sufficiency rather than maximization, then we can use money as a good enabler and set realistic goals.

Based on the choices that you make, and you live a life where we are satisfied despite not having everything or not having the maximum because we realise that we don’t need everything when we have secured what is most important to us.

More on MoneyOwl

MoneyOwl is the newest social enterprise under the NTUC Group, in the business of delivering financial advice. Our mission is a social one where we want to help Singaporeans from all walks of life to reach their life goals and achieve greater financial well-being.

Our work comprises of comprehensive planning that addresses all aspects of your finances. Be it savings, investments, protection or wills and we also integrate CPF into the core of retirement planning.

All of our advisors are fully qualified and fully salaried, so they are not commissioned-based. We also use a robo-platform for part of the works so you can plan without any hard-sell at your own convenience.