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Be smart with your provident fund

Many younger employees complain that their take home salaries get reduced because of compulsory 12% cut that goes to their provident fund. Why brother, they'd think, retirement is 35 years away! But that's naïve thinking for several reasons and here's why.

Piggy Bank with coins

The power of compounding. With compound interest, your Employees' Provident Fund (EPF) money grows surprisingly fast and the annual interest earned will become higher than your contribution after a while. Moreover, with your employer contributing an equal amount, it grows faster than any bank account. The longer you are in the fund, the better, since the power of compounding is maximized. So try not to withdraw any EPF money before you retire. And transfer your EPF to a new employer if you change jobs.

Add your own power. This is something people neglect and often don't know about. While 12% of your salary is compulsorily deducted, you may voluntarily add any amount you like from your salary. This will boost the power of compounding even more and leave you with a much larger amount when you retire.

EPF is tax free. Even under the new Direct Tax Code, which could become operational in a year, your EPF balance and any interest earned will remain tax free.

Retirement and price rise are certainties. Retirement doesn't always have to be with a send off on your 60th birthday. You could lose your job anytime before that, become ill or incapacitated. So EPF is the nest egg you must build for a future when medical expenses may be regular, prices would have multiplied 50 to 100 times, and you may not have a regular income.