Should I Top Up And Max Out My Baby CDA?

With banks slashing interest rates left and right, Heartland Boy spent the past few months brainstorming how he can continue to maintain relatively high interest rates for his savings. So far, he has managed to:

1. Achieve 2.5% on $10,000 savings in Singlife
2. Achieve 2.06% on $26,000 savings in Etiqa Elastiq
3. Achieve 2.1% by unlocking salary + 3 categories for his DBS Multiplier

Despite the above, he feels that is still room for improvement and decided to review his financial net worth spreadsheet again. To his pleasant surprise, he realised that he had neglected the 2% interest rate awarded to funds in the CDA account. After some discussion with the wife, they decided to perform a top up of $10,000 into Olympia’s CDA. Find out the reasons why they have done so.

The Best CDA Account

Heartland Boy had previously written about how he had reviewed all the CDA accounts available in the market and decided that the POSB Smiley CDA was the best CDA account for his newborn. At that time (2018), its package of high interest rates, Baby Bonus NETS Card, as well as welcome gift of an SQ infant ticket was the most compelling amongst the local banks. To recap, the POSB Smiley CDA provides 2% p.a on all balances. Till today, this 2% p.a. interest rate remains, although it is restricted to balances up to $50K. (Heartland Boy is hoping that it won’t be slashed anytime soon) For obvious reasons, Heartland Boy was quick to deposit $3,000 to maximise the dollar-for-dollar matching from the Singapore government then. Together with the CDA First Step Grant of $3,000, Olympia’s CDA began with an opening balance of $9,000. After 22 months, that amount has since decreased slightly to approx. $6,000, but at an alarmingly faster rate lately.

Why Top Up Your Child’s CDA Account

1. Can Be Used For Childcare Fees

The main reason why the funds in Olympia’s CDA were drawn down at a faster rate recently was because they have been used to pay for her childcare fees. This is done via an interbank GIRO arrangement. CDA funds can be tapped because the childcare centre that she attends is an approved institution registered with the Ministry of Social and Family Development (‘MSF’).

Heartland Boy’s personal opinion is that childcare is a necessity and therefore childcare fees is a form of inevitable spending. Since they are most likely going to be incurred in the future anyway, Heartland Boy sees little harm in injecting some funds into Olympia’s CDA today to allow them to benefit from a relatively high interest rate.

Furthermore, most credit cards available today do not reward cashback for payment to educational institutes. Hence, this is another reason to justify leveraging on CDA monies to pay for childcare fees.

2. Can Be Used For Medical Expenses

As a first-time parent, Heartland Boy realises that events such as trips to the pediatricians and A&E departments of hospitals are actually par the course. This is all because your baby is meeting all types of viruses for the first time and gradually building up her own immunity system. Thankfully, CDA funds can be used for your child’s outpatient treatments. It can even be used for Medisave-approved Integrated Shield Plans. (Here’s a list of insurance policies I bought for my child) Heartland Boy is grateful that these out-of-pocket expenses can be funded by deposits in the CDA because they definitely do not come cheap.

3. Unused CDA Funds Are Transferred to PSEA

Since POSB Smiley CDA offers 2% interest for balances up to $50,000, Heartland Boy did a one-time top up of $10,000 for Olympia’s CDA. This is approximately worth 2 years of childcare fees. In the extremely UNLIKELY event that they are unable to exhaust the CDA funds by the time Olympia turns 13 years old, the unused balance can be transferred to her Post-Secondary Education Account (‘PSEA’). Funds in her PSEA can be used to pay for her or her siblings’ (if any) post-secondary education fees in Singapore.

Once again, if the PSEA funds remain unused, they will be transferred to her CPF OA by age 30. In other words, the monies do not disappear and there is every opportunity to utilise them for her own benefit.

Conclusion of Topping Up Baby CDA

While the interest rate offered is indeed attractive, Heartland Boy is also careful in trying not to over-commit his monies in his child’s CDA. Afterall, this is still a savings account that comes with some form of restrictions despite its wide application and usage. That is why he is hesitant to max out the CDA balances eligible to earn 2% interest rate. This eventual amount is him trying to strike a delicate balance between chasing higher returns and opportunity cost; who knows what would happen to interest rates when a vaccine for Covid-19 is found?

Information is correct as at 30 Aug 2020