Today I'll be writing an interesting article on 5 really counterproductive behaviours people do with their money that is seriously not advisable.

1. Taking out your CPF at 55 and putting it in a low interest savings account

So a lot of people are always looking forward to taking out their CPF monies once they turn 55. There's really nothing wrong with taking out the money if you NEED to use the money. However, more often than not, people take out the lump sum only to put it in their savings account or fixed deposit.

Here's the problem:

This means that if a 55 year old can withdraw for example $50,000. This person would be potentially giving up an interest of $1,250 or $2,000 for a year's interest and settling for $25 instead assuming this person withdraws their CPF monies simply to put it in the bank. If a person does not need the money for a couple of years as most 55 year olds are still working, the compounded interest in the CPF can add up to quite a substantial figure.

While I can understand the excitement of finally regaining control of their money, it is really an unwise thing to do. Even if one needs some money for survival, you can withdraw the excess CPF funds as and when you need after 55 assuming you have excess to withdraw. There's no hurry to withdraw everything in a lump sum to put it in a savings account with low interest.

Many individuals guilty of this may not be reading financial articles. Do share this info with them so that they can make better decisions. It's paramount you share it with your loved ones before they turn 55. Once the lump sum is taken out of the CPF, you can't put it back in full with the same privileges.

2. Take out cashbacks from Endowment plans or dividends from investments and put it in a savings account

Another alarming behavior I encountered is people who take out money from their investments or insurance plans simply because they can and putting it in a low interest savings account. Not too long ago, a client texted me when she received a cashback letter informing her that her cashback in her endowment has been added to the accumulation pot. She asked me what the letter meant and upon realising there's cashback (she forgotten about the feature), asked to withdraw the money. Many years back she took up the plan for her child's education and it's only when I reminded her of her purpose that she changed her mind about the withdrawal.

This makes me wonder, how many people have been taking out their cashbacks for fun and putting the money they don't need in their savings account. Cashbacks kept in endowments can be reinvested at a higher return rate. For most companies, the current prevailing rate is around 3%. If your bank savings account is with POSB, you are probably enjoying 0.05%. That's a big trade-off to sacrifice simply to see the money in your bank account. Likewise, a lot of investors withdraw their dividends from their investments instead of reinvesting the funds to compound their returns. A lot of times, people who withdraw from these instruments are still working and don't need the money they withdrew. Such behaviors might be a little oxymoron because the intention of taking up wealth preservation/accumulation instruments in the first place is to beat inflation and to grow wealth. There's no logic in taking money from the higher return generating instrument to park it in a low yield instrument simply to see the money there.

You might also be horrified to find out that this action of taking out cashbacks from endowments or dividends from investments and putting it into your savings account will instantly guarantee a loss of wealth. Given that the inflation rate is currently between 2-3%, keeping the money in a lower interest account without utilizing the money will definitely erode its purchasing power.

3. Terminate endowments or investment plans to 'save more money' in your savings account

This is another epic facepalm moments for me as an advisor. Sometimes, I see people on forums asking about whether they can terminate plans due to some hear-say that the plans are 'bad'. In my opinion, there's no such thing as bad plans. There's only unsuitable plans. The thing about financial instruments is that it channels existing funds into another place where it becomes less visible on a day to day basis. I want to assure you that the funds are still there!

Most of us don't check our internet banking everyday, and definitely not our insurance/investment online portals. We may check our ATM accounts more regularly if we do daily withdrawals. Given that we don't see the money we contribute to our investments or endowment plans, we somehow think we are spending money on these instruments. In reality, isn't the very purpose of taking up these instruments in the first place to get a better yield on your surplus cash? It is possible people forget because they bought these solutions on impulse at a roadshow or while carrying out a bank transaction. Yet I'm sure, even if it's an impulse purchase, they did it because of an intention to grow their wealth. I'm sure nobody consciously signed up a plan because they just felt like spending money.

Terminating such solutions and potentially suffering losses in the process to create the impression you are now richer because you can see more money in your bank balance doesn't actually make you richer. In fact, you became poorer. All this action does is to give you more control of your money. However, if you are making such detrimental financial decisions, maybe giving you more control of your money would be doing you more harm than good. It is better to automate your savings into these financial instruments so that you will really have savings in the future.

4. Find ways to spend extra money

This is another funny one. Recently the government has been exceedingly generous with citizens. While it helps certain groups of individuals affected by the on-going recession, not everyone is financially impacted. During this period, I have noticed a lot of excessive spending behaviors either through online shopping or at the NTUCs. The worse and probably winner of the unnecessary spending award would go to those getting fined for safe-distancing and not following newly imposed COVID-19 rules.

I think whenever people come across excess cash such as bonuses for instance, they feel a need to 'reward' themselves even when there's nothing they really want at the moment. Don't be mistaken, I'm not suggesting don't spend money. In fact, I'm a big fan of living life to the fullest. What I'm trying to bring across is don't spend money simply because you have more. If there's something you really want and is already aiming for, by all means use this surplus cash to pamper yourself. However, if there is nothing you really want at the moment, there really is no urgency to try to find something to buy simply because you come across additional funds.

This mindset of having a license to splurge because the money coming in is additional of our usual income is very detrimental to wealth building. This type of thinking is what segregates the wealthy from the poor. The rich build wealth by understanding the value of money. They know that money is hard-earned. 'Free money' is also hard to come by and is equally valuable. Hence they only spend it on things that are meaningful to them. The poor on the other hand live in a world of scarcity. There is a feeling of deprivation most of the time and a need for instant gratification. Hence, when they get access to 'free money', they view it as money that can be splurged since it does not affect their usual income. The thing is, if we adopt a mindset where every form of 'free money' can be spent freely, then where is the booster to help us to accumulate our wealth faster and get out of the rat race? Do most of you who splurge on these 'free money' earn a huge income where you already have so much surpluses you see no need to save anymore?

5. Taking a loan which you don't need in order to pay big purchases monthly

This is another strange behavior of the financially uneducated. Big purchases like cars, property and renovations allow people to take loans if they cannot afford to purchase it in full. In my opinion, for certain purchases, they can be wants rather than needs. For example, a car or an elaborate renovation. Sometimes taking up the commitment is totally unwise because your financial wellness might require attention in other areas like building up your emergency funds instead of taking on a debt.

In this article though, I want to address people who can afford these purchases, have surplus cash in the bank but chooses to take a loan so that they can use their monthly income to pay for their big purchase. In their view, they are reducing the financial stress on themselves. From a mathematical view, they are choosing to pay an interest of 2.7% - 3.5% simply to have the luxury to pay monthly. Do they have surplus funds outside of their emergency funds to pay off the loan upfront? Yes, but they 'feel better' not seeing the money spent at one go. A loan of $50,000 at 2.7% for 7 years (assuming full car loan) translate to an additional $9450 paid. A renovation loan of $50,000 at 3.4% for 5 years translate to an additional $8500 paid.

Many times, people see interests paid as a small amount because their repayments are broken down monthly. Most of the time, people may not even calculate the total costs they spend on the item inclusive of the interest paid. If I told you your car costs an additional $9000 or your renovation costs an additional $8000 upfront, would you have agreed to buy? You might not. Then why when you pay it off gradually, the price suddenly appears reasonable?

By the way, I took a full car loan on my car. However, the idle cash didn't sit in my bank simply to give me a peace of mind. I invested it and got a return greater than the interest I paid for my car. This, in my view is the only time it is reasonable to pay interest in order to retain control over your lump sum of savings. If you are keeping the lump sum on hand because it can help you to earn more money, then by all means go take a loan. However, if you are keeping the lump sum on hand simply because you feel happy seeing a big sum of money in your bank balance, then you really need to ask yourself if the item you are purchasing and your peace of mind is worth that additional cost your loan would require you to pay.

For the middle class to the lower income groups, I'd say paying a massive premium when you can avoid it is very costly to other long term needs which you may or may not have started to prepare for.

If you are currently facing a dilemma whether or not to make certain financial decisions, please speak to a trusted advisor. You can drop me a message if you would like me to help you with it. Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about financial literacy. Like my page if you would like to read more of such articles. Follow me on Instagram if you would like to receive short lessons/updates on investment, personal growth and savings through my insta-stories. Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.