A client recently e-mailed me the below question…
Q: My husband and I are expecting our second child in a few months. One of my daily regrets is that I’m yet to start saving for my first born (now 4 years old) child’s education. How do I right this wrong and ensure I’m better prepared for my unborn childs’ future education needs?
Here’s my answer below. I hope it helps you too.
Being a parent is tough. There are just too many things to manage all at once. If you’re like me, most of your day is spent worrying about your children’s mental wellbeing, physical health and their social skills. Then, there is the thought about their future, and the education cost of making that desired future a reality. No parent wants the lack of funds to come in the way of their children realising their dreams.
Modern living requires parents to constantly be juggling multiple endless responsibilities with very limited resources. It is for this reason that we advise that when saving for your child’s education, it’s best to start as early as possible. This makes the goal more achievable and affordable.
However, to save effectively you need a plan and a reasonable estimate of eventual costs. Here’s how you can estimate the amount you’ll need to save for your child’s education:
Step 1: Determine the time horizon – For investments, time is the most crucial factor. Based on your child’s current age and the age at which they will pursue higher education, determine how long (time horizon) you have to save.
Step 2: Research the cost of education – Understanding the current cost of education depends on where you live, the level of education you want your child to get, and the type of institution you want them to go to. Also, determine whether your child will study locally or abroad and whether it will be from a public or private institution.
Step 3: Consider the impact of inflation – According to the government, the costs of education (10%) are expected to rise faster than the costs for other services (6%). Accounting for this higher cost as a result of inflation is essential.
Step 4: Calculate the rate of return needed – A reasonable rate of return on your investments is important. The rate needed should be higher than the rate of inflation so you can preserve the purchasing power of your money. In a high-equity fund, for example, you could expect a rate of return higher than your bank’s fixed deposit rates over the long-term. Although the rate of return isn’t fixed in a fund, you can take an educated guess on the long-term returns based on historical data.
Step 5: Calculate the required monthly savings – Finally, with the expected rate of return and the final financial goal in mind, you can calculate the exact amount you will have to save monthly. Consult with an investment manager to figure out how much you will need to save every month to meet your target.
Follow these 5 easy steps to help you calculate the exact amount of monthly savings you will need to meet a future target for your child’s educational needs. Other important questions to consider are: –
- Can you afford to save as much as you would like? If you have other savings goals, what are your top priorities?
- If your household budget is tight, can you change your spending habits so you can save more? If you can’t spend less, you will have to change your savings goals.
- How can you assist your child in improving their academic results? Qualifying for a bursary, scholarship or grant can provide tremendous financial relief and make the investment goal more attainable.
- Is a student loan or your child getting a part-time job whilst studying a realistic or viable option?
Financial experts agree you should not give up retirement contributions to save money for a child’s education. There aren’t many places you can go to get money to live on after you retire, but there may be other ways to pay for your child’s education.
Regarding your investment strategy, depending on your situation, you may choose to be more aggressive in the early years when you have more time to build up your savings. Then, as your child finishes high school, you may want to move your money into more conservative investments to make sure it’s there when you need it.
Your approach will depend on your goals, the time you have to save, and how comfortable you are with investment risk. Make sure you check your progress along the way and adjust your approach if needed. If there are still some years to go before your child starts school, consider investing for higher potential returns, according to your preferences and risk appetite.
Another option to consider is Education insurance. This will cover the associated costs (tuition, travel, uniform, stationery, food etc.) of educating your child in the event of your death and/or permanent disability.