2019 was a special Chinese New Year (CNY) for Heartland Boy as he celebrated it with the addition of a new family member. After 3 straight years of giving out red packets during Chinese New Year, he was blessed enough to once again find himself on the receiving end of such a lovely traditional custom. As a parent to a 3-month old, he finds himself entrusted with the responsibility of safe-keeping the hong bao monies that Olympia has received during CNY. He vividly remembers those times when his mother brought him to the friendly neighbourhood bank to deposit his ang bao monies. Unfortunately, those monies only earned a paltry 0.05% interest rate which was not even sufficient to beat inflation. Like many parents who want to use hong bao to teach kids about money, Heartland Boy is no different. As a financial blogger, he definitely hopes to achieve a better financial return for his daughter. This blog post reveals how he intends to grow his kid’s ang bao money before she becomes financial literate.
Heartland Boy has brainstormed and reviewed 3 methods over which he could help to grow his kid’s angbao money.
1. Top Up CPF Accounts
Relying on the Retirement Sum Topping Up Scheme (RSTU), Heartland Boy can deposit cash into Olympia’s Special Account (SA). The first $60,000 of a member’s combined CPF balances, with up to $20,000 from the Ordinary Account, can earn an extra 1% interest. Therefore, funds sitting in Olympia’s SA will earn up to 5% per annum.
Alternatively, he can top up cash using Olympia’s ang bao money into all of her CPF Accounts. This is known as the Voluntary Contribution (VC) scheme. The funds will be distributed into all her CPF accounts according to this allocation since she is below the age of 35- Ordinary Account (62%), Special Account (16%), MediSave Account (22%). Here is a summary of the pros and cons of depositing ang bao monies into the CPF using either the RSTU or Voluntary Contribution schemes.
Diagram 1: Pros and Cons of topping up ang bao monies via the RSTU and VC Schemes
The VC scheme may appeal to certain parents as the chances of using the funds deposited in the MediSave Account can be very high. For instance, Heartland Boy was recently asked if Olympia would like to have additional immunisation at the polyclinic. Those immunisation jabs could be deducted from her MA or her Child Development Account. Do you know that all new-borns who are Singaporeans born after August 2012 will automatically receive $3,000 in their CPF MediSave accounts? As a parent, you can apply to view your child’s CPF statement’s online since they are not old enough to have a SingPass yet.
Do note that whether it is VC or RSTU, either method will not attract tax relief for the giver.
2. Buy Into An Index ETF
Heartland Boy remembers that in one of Adam Khoo’s books, he revealed that he would use his children’s angbao money to purchase the S&P 500. According to Investopedia, the average annual return for the S&P 500, in USD terms, was 9.8% over the past 90 years. Now that is a very strong track record and probably a very sound strategy to execute for the next 20 years before Olympia morphs into a full-fledged adult.
Closer to home, the STI ETF returned 7.5% between 2002 to 2017. That is indeed a very decent interest rate to compound at.
3. Active Stock Picking
Some parents within the financial blogging community actively invest on behalf of their children. Brian of A Path To Forever Financial Freedom comes to mind. He relies on his astute stock picking skills to invest in some Singapore blue-chip stocks for his children. These blue-chip stocks hands out handsome dividends and will likely be here to stay for a long while.
Heartland Boy did think about this route. However, given his dismal investment performance in 2018, he is now even less inclined to pursue active stock picking for his daughter. Nevertheless, he believes that it is possible to allocate a small portion of her monies into some tech giants. Tencent or Alibaba comes to mind as both of these companies should shape the Chinese economic/tech landscape during Olympia’s generation.
Diagram 2: Olympia is so lucky to receive all the angbaos during CNY, including Heartland Boy’s brithday ang-baos!
Chose CPF RSTU & MediSave in 2019
For the year of 2019, Heartland Boy decided to go for the safe route of depositing his child’s monies into her CPF Special Account and MediSave Account (more on that below). This would yield Olympia a guaranteed 5% interest per annum as long as (i) her combined balances are less than $60,000, and (ii) the government doesn’t change tack. This was a superior option because he believes that the equity markets, especially the US ETFs, does not offer a superior risk-reward at the moment. However, in the immediate aftermath of a hypothetical recession, the choice of investing in an index ETF would be rather straightforward. In other words, any other year, Heartland Boy would have picked either the S&P 500 or the STI ETF option. Active stock-picking would also be feasible if not for his rock-bottom confidence at the moment.
How To Perform A RSTU For Your Child
For parents who are curious, this is how to perform a cash top up to your child’s Special Account. Log onto CPF services with your Singpass.
A) Go to My Request > Cash Top Up To Special Account > Paynow via QR Code
Diagram 3: Select Paynow if you have one as this is super convenient
B) Impute your child’s NRIC, the hong bao amount and confirm the transaction
C) Log onto your bank mobile app that you have authorised for PayNow and scan the QR code to pay
How To Perform A Cash Top Up To Child’s MediSave
Some experienced parents on various parenting forums also shared that it is possible to top up your children MediSave account. Likewise, this could yield 5% interest rate per annum for the first $60,000. Do note that funds in MediSave are subject to the Basic Healthcare Sum for the year. Funds deposited in the MediSave can be used to to pay the premiums for the child’s private hospital plans. Heartland Boy had previously highlighted how it is extremely important to purchase an integrated shield plan for your child.
A) Go to CPF’s e-cashier services. Do not log on to your account
Diagram 4: Cash-top-up your child MediSave.
B) Impute child NRIC, select “Member”.
C) Choose “Contribute to My MediSave (Tax Deductible)”
D) Proceed to make payment
Performing an ang bao cash top up to your kid’s MediSave account is definitely superior to a RSTU, and that is why Heartland Boy intends to deposit the bulk of her red packet money into her MediSave. As a father, Heartland Boy could not be more excited to educate Olympia on financial literacy. 20 years later, he can only hope that he has made good use of her ang bao monies throughout her childhood. This is because it has the potential to become a small gift that will give her a decent head-start into her adulting journey.
Hi Heartland Boy,
does this help with tax reduction too?
Hi Mummy123,
Nope it does not. Topping up cash to child MA is only tax deductible for the child, and if your child is not paying income taxes, there is no tax relief.
STI ETF investment needs to be careful. There is timing involve to achieve 7%. Meantime SSB is good alternative.
Thanks uncle cory! your advice is well-heeded.
Thanks for sharing. This reminded me to do something about my baby’s angbao and birthday cash in his piggy bank!
For his first year angbao I opted for number 3. Went quite ok, just don’t be too speculative about it.
I personally wouldn’t put cash into his CPF now as it is a one way traffic for now, there will be alot of instances along the way when cash is required as baby is still very very young. Something that can be liquidated easily is preferred for me.
But anyway thanks for writing this post! Some food for thoughts.
Thanks. i think maybe 70% of the time i would go for option 2 or 3. it just that us market is quite toppish now