A better idea is to look for higher returns, says Mr Aaron Chwee, head of wealth advisory at OCBC, who notes that there are other “strategic options” for the money.
But before parents look at ways to increase a child’s hongbao cash, financial advisers say they need to ensure that they themselves have emergency funds of at least three to six months of expenses.
Any comprehensive financial plan for a child should have both insurance and investment components.
Insurance protection products, such as a personal accident plan and an Integrated Shield Plan for hospitalisation, ensure there is adequate coverage against unforeseeable injuries or accidents, says Ms Helen Shen, group head of products at Singlife.
Whole life insurance is a nice-to-have if there is extra hongbao money but parents must make sure they can afford the premiums, which can hit $1,200 a year over a premium payment period of 15 years.
Ms Irma Hadikusuma, chief marketing and healthcare officer at AIA Singapore, says whole life insurance premiums are lower for young people. The premiums are locked in and do not rise as the child gets older so parents essentially pay the same amount throughout the payment term.
Whole life plans also cover the child for his lifetime, with the option to add on coverage for critical illness, Ms Hadikusuma says.
Once basic protection needs are taken care of, parents can focus on the child’s medium-term financial goals which, for most, will be a tertiary education.
Mr Thomas Lee, chief product officer at Manulife Singapore, says parents can use the hongbao money to buy an education savings plan – a type of endowment plan designed to help parents save and grow wealth for the purpose of funding future education fees.
This plan fosters discipline, says Mr Abel Lim, head of wealth management advisory and strategy at UOB, adding that “it makes you focus on your end goal and contributes towards building that pot of money for future needs”.
Ms Lorna Tan, head of financial planning literacy at DBS Bank, adds that education savings plans pay out a sum of money at specified intervals during the policy term.
These payouts can be timed so that parents will have the money to foot education bills at different milestones, such as when the child goes to university.
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There are single-premium or regular-premium endowments. Single-premium plans usually require substantial upfront investments of at least $10,000, says OCBC’s Mr Chwee, while regular-premium plans are a longer-term commitment.
UOB’s Mr Lim adds that if parents have to terminate the policy early because they cannot meet the obligations, they may not get back the principal – all the premiums paid so far – in full.
So parents should choose an endowment plan with a payment term that they know they can commit to and which will give them the desired payouts at the specified times.
“If the kid is planning to go overseas, you know when you need the money,” says Mr Lim.
“Buy the correct tenure; that will be the most efficient way for one to contribute towards tertiary education.”
Because endowment plans guarantee a minimum sum assured upon maturity, they give parents a sense of security and predictability, says Ms Claudia Soh, chief financial officer at Etiqa Insurance Singapore.
Ms Soh adds that there are other low-risk investment options, such as Singapore Government Securities (SGS) bonds, for excess hongbao money.
SGS bonds with maturities ranging from 10 to 15 years, or even 20 years, are more suited for parents whose goal is to save for their children’s tertiary education.
With a minimum investment of $1,000, “you would be able to secure predictable returns whilst being assured that it is of minimal default risk”, Ms Soh notes.
Parents who can tolerate some risk could set up a regular shares savings plan with the hongbao money.
Ms Ashmita Acharya, head of international wealth and premier banking at HSBC Singapore, says regular shares savings plans are a great entry point for new investors, as they require a low initial investment and the monthly contributions are manageable.
Such plans essentially apply the dollar-cost averaging strategy by investing small amounts at regular intervals, regardless of market conditions. This takes the emotion out of investing and instils discipline as investors stick to their plans.
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There are a variety of blue-chip stocks, exchange-traded funds (ETFs), real estate investment trusts (Reits) and unit trusts that these plans can buy into.
A child has to be at least 18 years old before he or she can open an investment account, so parents will have to set up a joint account with their child before they can start investing through the regular shares savings plan.
Hongbao money deposited in that account can be used to buy stocks, ETFs or Reits, allowing the child to start investing from just $100 a month, says OCBC’s Mr Chwee.
When the child comes of age, parents can grant him access to the joint account so that the child can manage his own investments.
Some parents may have even longer-term goals, such as helping their children to buy their first home or build up their retirement savings.
They can do so by topping up the child’s Central Provident Fund (CPF) accounts with hongbao cash.
If their intention is to help their children accumulate a retirement nest egg, they can do a cash top-up to the child’s Special Account (SA) under the Retirement Sum Topping-Up Scheme.
However, there will be no tax relief for cash top-ups to a child’s SA.
A CPF Board spokesperson said that about 3,800 children under the age of five had balances in their SAs as at Dec 31 2024, with a median sum of around $1,000.
The CPF Board points out that cash top-ups to the SA are a long-term commitment to grow retirement savings so these top-ups cannot be reversed. The money is locked up and cannot be withdrawn for other purposes such as housing, investment or immediate needs.
Parents can also do a cash top-up to their children’s MediSave Account (MA) up to the Basic Healthcare Sum – $75,500 in 2025.
The MA can be used for healthcare needs and to pay premiums for the Integrated Shield Plans offered by private insurers for hospitalisation.
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DBS’ Ms Tan says: “If you are worried that you will rack up medical bills in your old age, then this option would provide an additional safety net as your child will be able to use the funds to cover your medical bills, too.”
She adds that parents can consider a cash top-up under the Voluntary Contribution Scheme.
They can make small and regular contributions to all three of their child’s CPF accounts – the Ordinary Account (OA), MA and SA.
Parents cannot choose to top up only the OA under this scheme as the amount contributed will be distributed to all three accounts.
The allocation rates for those under 35 are: For a cash top-up of $100, $62.17 goes into the OA, $16.21 to the SA, and $21.62 to the MA.
Ms Tan says OA top-ups will go some way to funding a child’s tertiary education and other big-ticket expenditure like housing.
Financial planning is not just about wealth, it is also about achieving good health, says Mr Jason Lim, head of product management at Prudential Singapore.
A Prudential survey found that 85 per cent of Singapore residents believe health is more important than wealth. Most also indicated that good health is a foundation for pursuing other life goals.
So, in this Year of the Snake, parents may want to consider using some of their children’s hongbao to invest in their health and well-being.
“Encouraging active lifestyles from a young age helps build strong habits that can last a lifetime,” Mr Lim adds.
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