Good and Bad Ways of Using Your CPF Money

Regardless of if you think CPF is a good thing or a bad thing, you can’t change the fact that you have to make mandatory monthly CPF contributions. Rather, the question worth pondering is how we can best use the fund that is sitting in our CPF accounts, since this is something we can actually decide and act on.

There are a plethora of opinions online on how to best utilise your CPF monies. Here, we discuss what are some of the good and bad ways of using your CPF money in an attempt to shine some clarity on this topic.

Related: A Guide to Understanding Your CPF OA (Ordinary Account)

It’s All About Cost vs Benefit Analysis

When judging which are the good and bad ways of utilising CPF, you must always consider how the benefit compares against the cost of drawing down on your CPF account.

The cost side of the math is actually quite simple: by withdrawing funds from your CPF account to pay for things, you are forgoing the 2.5% to 4% yield that is guaranteed by the government. Therefore, the economic gain you can achieve from using your CPF money elsewhere has to outweigh this cost to justify your withdrawal of your CPF money.

Paying for Your Home & Home Mortgage: Bad

The Ministry of Manpower’s website lists a number of ways that your CPF can be utilised. However, there are a few that aren’t all that ideal. Using your CPF to paying for your home downpayment and or home loan is one of them.

The reason for this quite simple. Your CPF’s primary purpose is for building retirement savings. When you use your CPF money to pay for your home loan, not only are you drawing down from your retirement nest egg,  you are forgoing your guaranteed return of 2.5% – 3.5% CPF Ordinary Account yield to finance your home purchase.

Worse, you will eventually have to “pay back” the amount that you withdraw from your CPF accounts after you sell your home, which increases at 2.5% per year. You are, in a sense, shifting the responsibility of growing your retirement fund from the government to yourself as the interest forgone is now your responsibility to make up.

Of course, with home prices being so high in Singapore, most Singaporeans would not be able to afford a home without dipping into their CPF accounts at all. However, you are better off using your idle cash that is only earning 0.1% in a regular savings account to finance your home purchase before you dip into your CPF monies.

CPF Investment Scheme: Bad/Neutral

Another popular way people utilise their CPF accounts is to invest it in stocks, bonds, ETFs, and funds. However, this is generally a bad idea for most people.

According to a study conducted by the CPF board, 44% of people who invested their CPF-OA monies through the CPF Investment Scheme from January 2019 to December 2023 did not outperform the guaranteed interest rate of 2.5%. In fact, 22% of investors actually made negative returns. These investors would have been far better off leaving their CPF money untouched.

This phenomenon is quite illustrative of what psychologists refer to as “better than average bias.” To put it simply, most people think in the world they are above average, which can’t be factually true because “average” by default refers to most people. By believing their ability to produce superior returns to be true, most people make the mistake of foregoing the guaranteed 2.5% yield and end up making less.

Unless you are willing and able to put in a lot of effort in studying and evaluating your investment opportunities, you are more likely to be better-off by not participating in CPF Investment Scheme and leaving your money in CPF Ordinary account.

Paying for Your Education: Good

In contrast, using your CPF to pay for your education can actually be a worthwhile exercise.

Most student loans in Singapore come with an interest rate of 4.0% – 5.50%, which is much higher than the 2.5% returns that your CPF OA will provide you.  Forgoing said 2.5% that you earn in your CPF Ordinary account is actually a much cheaper way of financing your post-secondary degree if you don’t have sufficient amount of cash on hand as compared to taking out a student loan with a bank.

That being said, there are some caveats you should consider before rushing to use your CPF to finance your education. First, you have to repay the full amount of CPF savings withdrawn for education along with the interest accrued (i.e. 2.5%), similar with home loans. While this may not be so difficult with a home loan, since you are receiving a large chunk of fund when you sell your property, the only thing you get from a university or a polytechnic course is your degree or diploma. You are unlikely to have a large windfall to repay your CPF for a while after graduating.

Secondly, you have to consider what your return on investment will be post graduation. While it is true that university graduates and polytechnics graduates make 50% to 100% more than those who only have an Institute of Technical Education (ITE) certification, this can vary heavily depending on your major as well as the institution you attend. In some cases, attending some of these institutions may not help you make more money compared to what others make with just a secondary degree.

In general, however, we believe achieving higher education is generally a great idea for one’s long-term prospects. Despite the caveats mentioned above, paying 2.5% of opportunity cost for a reasonable chance of increasing your income by at least 20-50% forever (which would mean difference of tens of thousands of dollars) is definitely a good trade off. Of course, this would only apply to those who can’t pay out of pocket for their education expenditures.

Related: Should You Take Out An Education Loan or Personal Loan For Your Higher Studies?

Increasing Yield on your CPF Accounts: Good

There are other ways you can increase the yield on your CPF money that are safer and more economically sound.

For one, allocating your capital from your CPF Ordinary Account to your CPF Special Account and Medisave Account can instantly boost your yield from 2.5% to 4%. Not only that, these rates can go up by an additional 1% for the first $60,000 of a member’s combined balances (with up to $20,000 from the OA), and another 1% on the first $30,000 of their combined balances (with up to $20,000 from the OA) for people who are aged 55 and above. This means that people aged 55 and above can earn up to 6% of interest on their retirement balances guaranteed.

Of course, CPF’s study showed that 55% of people who used the CPF Investment Scheme between January 2019 to December 2023 generated profit in excess of the 2.5% guaranteed rate that they could’ve earned in their CPF-OA. If you are one of these people, you may have a legitimate reason to allocate less money to your CPF Special Account account. Otherwise, actively utilising these instruments are great, steady ways to grow your wealth over a long period of time without much risk or effort on your part.

If you would like to learn more about other ways you can grow your wealth, check out our investing resources as well as results page of the best online brokerages in Singapore below!

Read More:

• Simple Ways To Grow Your CPF Interest
• How to Optimise Your CPF Savings Now That The Special Account (SA) Is Closing
• 4 Things Millennials and Gen Zs Must Do to Become Millionaires
• Investing Is Easier Now More Than Ever. Here’s How You Can Get Started.
• Investing 101: Why You Need To Invest To Grow Your Money

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