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24 Nov 2022
SOURCE: John Lim, liveyoungandwell.com
John is excited about helping young adults make finance, less of a dull and sleep-inducing process, and more of a fun journey. He speaks and writes about happy and healthy workplaces at liveyoungandwell.com.
Jessie J may have been wrong when she sang 'It's not about the money, money, money'.
Okay, okay, I will stop with my hopeless serenade.
As freelancers, and self-employed persons (SEPs), it is all about the money. More specifically, it’s all about the cash.
I remember the first time I contributed to my own CPF as a self-employed person. It hurt to set aside hard-earned cash when I could have used them for urgent needs or wants. But today’s article isn’t to tell you that it hurt. It’s to encourage us as self-employed persons to contribute to our CPF. Before that, it’s useful to examine why we find it so difficult to contribute to our CPF.
When we hear of our employed friends griping about their salaries, we know that as SEPs, we get to keep every cent to ourselves. We don’t have to lock it away in our CPF till we retire.
We want that liquid cash that we can use anytime, anywhere.
Putting it into the CPF, where no ATM card or bank PIN can access, may seem like a poor decision.
But why should you still try your best to do it?
Providing for your present and future needs is like preparing a football team. Different instruments have different roles to play.
Cash, for example, can serve as a useful goalkeeper, for the times when you’re in desperate need. The tragedies of life may threaten to score a goal against you, but having liquid cash helps you manage these tragedies.
Your CPF can serve as the trusty centre back that safeguards your future retirement needs.
As much as you may argue that you could possibly earn better returns on your cash in your stock or crypto investments, those are different players from the role CPF plays. CPF is your centre back. Your higher-returning investments may be your strikers.
But even the best strikers don’t always score. That’s why your defenders still matter.
Because when it comes to the end of your life, you don’t only want to maximise the upside, but you want to cap the downside.
You don’t want to come to a place where you’re needing to stand in line at your local Meet the People Session to ask for groceries or financial help. You wouldn’t want to be counting pennies, wondering how much you can spend on food this week.
No, I really don’t think any of us want to be doing that.
But unfortunately, some end up in those situations.
When I was working in the social services, I regularly saw many clients with similar stories.
One Mr Tan (whose name and identifying details have been changed), always worked in ‘cash money’ jobs. Those were jobs that were daily-rated. But they were also attractive because of how they paid you at the end of the day.
Mr Tan now finds himself unable to pay for the mortgage on his HDB flat.
The initial mortgage payments had exhausted his Ordinary Account, and now, he struggles to pay the remaining payments.
You may also well say,
I could rent now, and in future!
I’m not really sure of that. Not when you’re 70.
66-year-old Mr Ong was in a similar situation. For years, he worked in odd jobs. To save on rental, he even went across to Johor to rent. Daily, he would commute into Singapore to work.
Then COVID-19 struck. He found himself unable to commute and for months, he was sleeping on his factory’s shop floor before he eventually sought help. He hasn’t saved enough in his CPF to buy a home.
And as you know, CPF can’t be used to pay for rental. This meant that the only options available to him was the HDB’s Public Rental Scheme, where you pay a highly subsidised amount (starting from $25 a month, the amount you pay is based on your income) to stay in a public rental flat.
Often, the biggest difficulty for many living in these houses is that they never feel a sense of belonging.
They feel housed, but not homed. Home brings with it a sense of cosiness and conviviality, where you feel comfortable enough to kick off your shoes, dance to Michael Bublé, and sing out loud.
You may think that this won’t happen to you. And I hope it doesn’t.
But the rapid changes in life mean that we never do know when crisis will result in unforeseen circumstances.
Cap the downside by ensuring that you have enough in your CPF to pay for your housing, and regularly contributing to your CPF is the first step.
The CPF Ordinary Account provides a good base to provide for your housing needs, and its stable interest rates helps to steadily grow your savings too.
CPF is often seen as something for your own needs, but it can also be used for your child’s education needs. With a 4-year local university education at our national universities being an average of $36,000, it’s not a small sum to pay.
You may want to use your CPF to fund your child’s education, so that she doesn’t have to worry about her tuition fees while studying.
When you’re an SEP, contributing to your CPF can seem selfish. After all, when you have a family to feed, you don’t want to be taking away unnecessary money that can be used to provide for their needs.
But you aren’t. You’re giving your children options in future to pursue their dreams of education.
It’s not being selfish. It’s being noble.
Now you may say,
You only live once. Live in the moment, don’t worry so much about the future!
And you may also wonder why you should put aside money for a future retirement, when you’re older, less mobile, and probably unable to enjoy life as fully. You may ask,
Do I really want to wait until I’m 65 and probably having a creaking back before I ski down the slopes of the Andes?
Why not do that now? Why not just live life to its maximum potential, whilst you are still young and sprightly?
It’s not an either/or thing. You can still have fun whilst you’re young. But you also need to accept that growing old needs money. Whilst being a freelancer comes with the freedom of not having your income automatically channelled to all your CPF accounts, it also comes with the responsibility of taking care of your own retirement.
Whilst employees have their employers to (partially) take care of their retirement needs by contributing 17 per cent to their CPF, you are your own boss.
You need to take care of yourself.
Freelancing comes with freedom and responsibility. No one else will take care of you, but you.
This might mean certain lifestyle changes. Rather than spending 100 per cent of your income, it might help to earmark a portion to your future needs, just as the CPF does.
You may find that difficult, especially when your income is variable as a freelancer. Some months might see you closing a 5-figure deal, whilst others might see you earning $500 for that month. Having an automatic GIRO deduction might not be the wisest thing to do.
What then can you do?
Start small. I initially started putting 10 per cent of my income into my CPF voluntarily, especially when my income was very low in the beginning. Some months might see me earning $600. Contributing more would have meant that I would probably have to eat grass for the rest of the month.
This 10 per cent was on top of the compulsory MediSave contribution that I had to make as an SEP. For SEPs whose Net Trade Income (NTI) exceed $6000 a year, they have to make a contribution of between 4 to 10.5 per cent of their NTI into MediSave, depending on their age and NTI.
What I personally do is that on the 3rd of every month, I calculate all my income for the previous month. Regardless of my expenses for the previous month, I will pay 10 per cent of my income via a voluntary contribution to the CPF.
Doing this at the start of the month helps me to spend with the leftovers, rather than using my leftovers from the month to contribute to my CPF.
You might think that there are so many other things you could buy with the cold, hard, (and nice-smelling) cash, and putting these savings into your CPF is less pressing. Who doesn’t want holidays? Or that swanky car? Or that fancy handbag?
But topping up your CPF does not only ensure that your short-term needs are met, but also that your longer-term goals are secured.
It ensures that your medical and housing needs are adequately financed, whilst compounding the sums for your eventual retirement.
Trust me, you don’t want to be in a place when you’re 55, struggling to pay your mortgage, and eventually forced to downgrade your home of many years because your earning power has significantly reduced.
Having seen this happened a few times with the clients I used to serve, I saw how rarely we appreciate the foresight of good backup plans, until our best plans fail.
Which, if COVID-19 is anything to go by, happens more often than we care to admit.
Two days ago, I watched a movie at 2pm in the afternoon. I was tired and wanted a break.
After the movie, I couldn’t stop laughing. I felt an immense joy at being able to determine my schedule whenever I liked. I don’t think employers would have liked me watching a movie in the middle of work.
But with freedom also comes an accompanying responsibility to steward that freedom wisely.
Few of us want to spend our last days in a welfare home, or queuing up for help at a charity, or worried that we wouldn’t meet our bills for the month.
In the past, I saw CPF as an unnecessary burden, with a portion of my money going into the CPF! But as a SEP, I want to contribute more than I need to.
Because you only live once, I want that life today, and tomorrow, to be freeing, and flexible.
Information in this article is accurate as at the date of publication.