Building a robust children’s education fund

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“Education is the most powerful weapon we can use to change the world”

 

EDUCATION is the foundation stone for a child’s future security. It is quite natural, that as parents, we want the best for our children. Among all other things, a good education is something that every parent aspires their child to pursue.

As a parent, we want to give our children the best of opportunities to thrive, from attending primary school up to they go to university. However, with growing times, the cost of education has increased tremendously.

As costs rise, creating an education fund can provide peace of mind for parents and help children take advantage of the opportunities out there.

Despite wanting to provide children with the best of opportunities, other expenses sometimes take precedence. Sending our child to college or university in today’s times requires planning, strategies and investing into the right kind of funds and instruments.

This can only be successful with a farsighted plan in place.

With inflation reaching to a highest rate in many countries, major expenses of the average Malaysian household are growing at a fast pace. The cost of higher education is already high and rising at five to seven per cent a year.

Children’s education is one of the biggest cash outflows that families must plan for.

With this, the big question worrying us parents is: will we be able to fund our children’s higher education? We can, if we plan ahead and take the right steps. Let’s look at the challenges parents face while building their children’s education and how these can be overcome.

 

Time management

One obvious solution is to start saving early. The individual will not only be able to amass a larger sum, but the money will also increase from the power of compounding. Planning for your child’s education is a long-term financial goal.

The best time to start planning for your child’s future needs is when he or she is born. Assuming your child will go to tertiary education at the age of 18, you will have nearly two decades to create the right-sized of fund for your child’s need.

A delayed start not only yields a smaller corpus but can also jeopardise other financial goals. If you start investing for your child’s education in your 40s, you are likely to fall short of the required amount.

Often, parents dip into their retirement savings to fill the gap, but this can be a risky move.

 

No financial goal

Set children’s education as one of your financial goals. A financial goal develops clarity and answers some important questions on what the priority is, by when children need the fund, how much would they need and how much we want to invest in them.

Knowing the answers for these questions gives absolute clarity and enables you to decide on what you need to do next. Staying focused is a critical attribute that allows us to begin a financial goal without procrastination, being consistent in giving attention and putting effort until we achieve it.

Staying focused helps us concentrate during distractions and setbacks towards sustaining the effort and energy needed to reach our goals. Once we have clarity and focus, we will be able to work towards our goals no matter what may come our way.

 

Focusing on the strategy

Choosing the right type of investment vehicle is important if you want to preserve and grow the value of the capital you intend to use for your child’s education.

The goal should be to beat the inflation rate of the cost of education, which is at least five per cent. So, what’s the solution? For many of us, it’s to invest. There are several good investment vehicles to look into when deciding where to put your money.

Developing a robust portfolio with mixture of stock, bond, exchange trade fund (ETF), SSPN (Skim Simpanan Pendidikan Nasional) and real estate will be very beneficial.

Don’t rely on any one financial product. If you have limited time horizon (less than five years), you will have to rely primarily on fixed income instruments, which are likely to offer a lower rate of return.

 

Risk management

Term insurance is appropriate for most parents. Term insurance is a life insurance policy with a set duration. As an example, you take out a term insurance policy at age 30 that expires in 20 years.

It is up to the policy holder to elect to renew the policy at the end of the term. It is the cheapest insurance coverage available per Ringgit of premium and provides coverage if a devastating event arise.

Term life insurance is appropriate for both parents, even if one parent stays home. Every family needs a different and clear amount to cover their expenses and needs.

Factors such as your health, income, debt, outgoings and living expenses affect how much insurance is right for you. However, insurance saving plan are less reliable to build education fund, don’t fall for the sales pitch, understand how investment works and start calculating the internal rate of return.

Education planning is crucial and plays a significant role, both in the parents’ and child’s lives. It also offers us a road map to align our income and expenditure resourcefully.

This leaves no scope for overlapping of expenses, unfulfilled dreams, and financial stress. If you have a child or are expecting one soon, you should start planning for their education expenses early.

The sooner you start, the better it will be for your standard of life and your child’s future. Parenting is an ongoing journey of learning, growing, changing and adapting to changes in ourselves and changes in our child. Hence, enjoy the journey and good luck!

 

Gunaseelan Kannan, CFP, a Financial Adviser Representative by Bank Negara Malaysia and a Licensed Financial Planner by Securities Commission (CMSRL/B4198/2013), is currently pursuing his Doctorate research on entrepreneurship, financial planning and financial technology. He also lectures on accounting, finance and business fields in Asia Pacific University of Technology and Innovation (APU). He is the Winner of Malaysian Financial Planner of the Year 2020, from Financial Pl anning Association of Malaysia. He can be reached at [email protected].