Upon receiving your first paycheck, you would have realised that a portion of your monthly wages goes to your CPF savings for your future home, medical expenses and retirement. More specifically, it's 20% of your monthly wages if you're below 55. What many Singaporeans forget sometimes is that your employer is also required to contribute 17% of your wages to your CPF! And don't forget to take into consideration the risk free interest of up to 5% you can earn on your CPF savings.
Let's take a look at how Calvin managed to save up $50,000 in his CPF accounts in 5 years.
Calvin started working at 23 with a monthly salary of $2,100, out of which, 20% goes towards his CPF savings. This means that he would have contributed a total of $5,040 to his CPF accounts at the end of year one. His employer also makes a CPF contribution of 17%, adding up to $4,284. His CPF savings for the first year earns a combined interest of $173.
Fast forward 5 years, Calvin and his employer would have contributed $25,200 and $21,420 into his CPF respectively.
Calvin's CPF contribution: $5,040 x 5 years = $25,200
Employer's CPF contribution: $4,284 x 5 years = $21,420
While the sum of their combined contributions have increased at a constant rate over these five years, the amount earned from the interest on his CPF balance has been growing exponentially. Calvin noticed that the cumulated interest earned at the end of 5 years is almost 28 times more the interest he has earned in the first year. This is due to the effect of compound interest where your interest grows more interest.
If you haven't checked your CPF balances in a while, you'll probably get a pleasant surprise when you do so!