[CPF Hack] 3 ways to start saving for your child

When should parents start saving for their children?

Common sense dictates the earlier the better, as it will give you more time to build a robust security stockpile. Yet many do not do so.

If you are looking to start saving early for your child, here are 3 tips that I am adopting to save for my son’s future:

1.
Maximise your initial CDA returns

Rachel and I started saving for Asher even before he was born. We did some simple calculations based on our monthly combined income then, portioning out a small percentage each month so that we can reach the maximum dollar-for-dollar sum for the Singapore government’s Child Development Account (CDA) by the time Asher was born. In this way, we got the maximum return from Asher’s CDA.

The CDA is a part of the Singapore government’s Baby Bonus scheme. Children born from 24 Mar 2016 will receive an upfront grant (“CDA First Step”) of $3,000 from the Government, when their parents open a CDA for them. Beyond this grant, the Government will match any savings made to your child’s CDA on a dollar-for-dollar basis up to S$3,000, S$9,000 or S$15,000 (depending on the birth order of the child).

More information about CDA is available here.

Do not deplete all the money in the CDA though. The next two points will share on how you can tap on the initial CDA sum to grow your child’s savings further.

2.
Get the best low-risk interest rate for your rollover savings

Many parents might not be aware of this, but do you know that monies in the CDA can be rolled over to your child’s PSEA account when he or she turns 13? And later on in life, that money will go into his or her CPF’s Ordinary Account. It also draws a pretty good interest rate of up to 3.5% per annum for Ordinary Account.

For more details on how you can maximise your child’s CDA monies, read here.

Monies in the CDA can earn higher interest than a normal savings account. Parents may choose to open CDAs with any of these banks: DBS, UOB or OCBC. (For more details on the interest rates offered at these banks, please check with them directly.) Parents can use the money to support childcare expenses, including medical bills, which is primarily what we use Asher’s CDA for.

In addition, if the monies are not used up by December of the year the child turns 12, it gets transferred to the Post-Secondary Education Account (PSEA).

When a child enters school from age of 7 to 16, an Edusave account is opened for them. The government tops up about S$200 to S$240 annually for every child until they pass out of secondary school. Monies in this account earn a 2.5% interest. Likewise, it can be used for various miscellaneous fees, field trips and such. If the money is not used up, this sum is transferred to the PSEA too.

The PSEA monies also earn an interest of 2.5%. Students in tertiary institutions can use them to pay for their education and other miscellaneous fees.

If all the monies in the PSEA is still not used up by age 30, it will be transferred to your child’s CPF Ordinary Account.

Still not sure on how this works?

Consider this hypothetical example – if your child is born this year in 2016, the government will provide you with S$8,000 cash if your child is your first or second child. From this cash gift, if parents choose to set aside S$3,000 and deposit it into your CDA, the government will match that amount and the starting amount in your child’s CDA will be a grand total of S$9,000 (S$3000 (CDA upfront grant) + S$3000 (your contribution to CDA) + S$3000 (government matching your contribution))!

Considering if you do not touch this S$9,000 in your child’s CDA, by the time your child turns 30 years old, your child would have S$17,368.02 in his/her CPF Ordinary Account; almost double of the initial sum. This is a significant sum amount considering that you only need to top-up with the cash gift from the government to begin with.

3.
Voluntarily contribute into your child’s CPF account early

Many people may not be aware about this. You can voluntarily contribute into your child’s CPF account early so that he or she can have a head start in terms of savings.

If we recap on point 2 and 3, you can work on a combination of both to stretch your savings returns.

Keep in mind that the CDA monies are meant to help you provide certain approved expenses that are crucial to your child’s development in his or her early years. Therefore, spend it wisely. Concurrently, you can also voluntarily contribute to your child’s CPF as and when you have some extra cash on hand, to set it aside for your child’s future.

For Rachel and I, we made it a point that we only use Asher’s CDA to pay for his medical bills. For other expenses, we tap into a separate saving account which we have set up for him.

The CDA is primarily for educational and healthcare expenses. Any balance, as mentioned earlier, is rolled over to the PSEA and CPF eventually.

In addition, we also bought a life insurance savings plan for him, which will be sufficient to fund his tertiary education when he grows up.

I think the key is really to plan early, and know what your saving goals are for your child’s future. For us, we want to be able to provide for his education, current needs, emergency needs and a little more for him to cash out when he is a working adult. Plus if he grows up to be a prudent saver, carrying on our family tradition (LINK to previous YOLO article), the sum will be useful to kickstart his retirement savings.

It is not that hard to get all these sorted. Just spend a few hours with your spouse to discuss and plan these through. The earlier the better of course. 🙂