6.11.2012

Financial planning for Children Education



 

Financial cost of upbringing a child could quite daunting for a new parent.
It is no surprise that I had thought about the kids education from the first day that they were born. Eduction will probably form a large part of our finances. This is especially true when they reach university age.




It is prudent to start planning from Day 1. This way , you would not feel so overwhelm when the bill arrives when they start their higher education.

I would follow a simplified 5 step process in making a decision



Step 1 : Define your objectives

Our objectives in this case is to provide sufficient funds for our kids education. To be more specific, it would be our children's university education. For most, university education's will be the next biggest expenses next to the home and car that we would buy. As a result planning from day 1 when they arrived is essential.
Step 2 : Quantify your objectives

Since the objectives is children's education, as parents we always want the best for our children
We would assume university education would be the target we set for our children.
Next we would have to decide between a local or overseas education. An overseas education comes with additional costs like rental and living expenses overseas. The difference could be large between the two. It is prudent to always assume the largest expenses and adjust according to our budget. We want to have the bells and whistles, but we should not live from hand to mouth as well.


Source:Asiaone.com 2010

University cost (Selected)
Cost of Singapore University education
University           $12 600
Living Expenses $19 000
Total                   $31 600 per year or $94 800 total

Cost of Australia University Education
University *          $30 000
Living Expenses  $22 000
Total                    $52 000 or $15 6000 total

Cost of US University Education
University *        $51 200
Living Expenses $21 500
Total                   $72 700 or $218 100 total

If we project cost of living to increase by 5%
In 20 years time, the estimated cost for each country will be as follow

Singapore  $239 555
Australia    $ 394 204
US            $ 550 875
(The figures would be lower if only university cost is used. In Spore the cost of university itself will be projected at  $95518)

The figures are staggering , even in Singapore!
If we do not start planning since day 1, it will be more expensive in the future

*Higher estimate is used

Step 3 :  Your budget

Looking at the figures, one may think it is daunting and difficult to achieve.
There are however different methods you can consider to suit different budgets.
A conservative figure to consider using only the university costs in Singapore would be $416.7 per child per month
Per year  = $5 000
over 20 years = $100 000

Note : This would only cover the university fees. For expenses, the child can always have the option of doing part time work like tuition or holiday jobs (like what Daddy did when he was younger)

If you do have more than the minimum and have some spare cash lying around , refer to 'The Alternative' plan section.

Step 4 : Choose your  plan

There are numerous tried and tested plans in the markets, I will try to dissect them individually.

The insurance route
There are many insurance companies that promote Educational / Savings plan for your children.
It may sound perfect with taglines like save 10 years only for child eduction.
Moreover, most who took up these plans like the idea of 'forced' savings for their kids.
 
However the truth may not be as what it is depicted;

Most insurance company will advocate endowment or Investment link plans (ILP) for education
However such plans may not be able to provide you the returns you would achieve if you save / invest on your own. You may note you are also paying insurances as well as insurance commissions that would probably erode your total investment compared to a simplified savings plan. In addition ILP may be volatile and subject to market condition, thus it  may not be the guaranteed vehicle you seek.

I have found some interesting articles on the pitfalls of Endowment and ILPs. You may want to explore more in depth and do more research on these.

The Savings account
One of the reason many gave for choosing insurance plans is that they would be 'force savings' through regular premiums.

You can actually achieve the same effect by opening a saving account for the children and have monthly contributions via GIRO.
The following banks offered savings plans for kids from day 1
OCBC Mighty Savers
POSB Kids account
UOB Junior Savers account
CIMB Junior Savers
Maybank YoungStarz account
Standard Chartered Bank esavers kids

These accounts are opened jointly with parents. The age limit ranges from 12 to 21 depending on the bank. Some of the banks allow the child to operate the accounts once they reach a certain age.  Some banks provide extra insurance coverage and perks (which I think is not necessary)

Amongst the banks,  CIMB has the highest interest rates(max 0.8 %) follow up Maybank(max 0.375 %)  and Standard Chartered bank(max 0.25 %). If you are comfortable with CIMB (the latest entrant to the banking scene) you can consider their saving accounts. Do note that this account is covered under Deposits Insurance Scheme (up to SGD 50000 per depositor) which gives you additional peace of mind.

With regular monthly 'forced' savings, you probably can outperform endowment plans. In addition for saving plans, you can choose to increase your savings when you have better cashflow in the future. This would significantly help in achieving your aim and gives you flexibility as well in the near term (i.e. save what you can afford)

In addition, angpows from CNY and birthdays could also be diverted here for savings .

Baby Bonus
This should be your starting block for savings plans. Refer to Baby bonus for more details.
Baby Bonus comprises of 2 segments, a cash gift as well as Child Development account(CDA)
Cash gift- amount depending on ranking of child. 1st and 2nd receive $4000 , 3rd and 4th receive $6000. We used this as seed money to open our children's account.
CDA- accounts to open with either SCB or OCBC
Government with give a grant of $6000 for 1st and 2nd child, $12000 for 3rd child and 4th child and $18000 for 5th child onwards (provided you place the same amount in the accounts, else it will be matched to your deposit) It is highly recommend you place the maximum amount as the account can be used for fees in schools or medical related expenses.

The alternative
There are many other options in place of regular savings plans. It depends on the amount of savings you are willing to put aside. In addition , some plans require sacrifice on our part.

If you have the extra funds, you can consider the following
  • Long term bond to grow your funds -A 10 year SGD bond pays an interest of about 2% to 6% or more depending on issuer. Go with a blue chip company or SG Govt or govt back companies
  • High dividend blue chip stock, preferably pays 5% or more in dividends
  • REITs
Do note investments should not form the core of your savings, Deposits should  be the core. This is because it is  less volatile and more predictable for longer term planning.

There are also ways to grow your money. The 2 key words are discipline and sacrifice. We need to define what is need and want. We can always save extra on an alternate holiday, less expensive car, unnecessary toys or luxury goods.

In addition, for kids, having branded clothes or expensive toys may be a waste in the long run. Kids tend to outgrown their toys and clothes pretty quickly. You may consider the option of rent or second hand toys. We should use the funds save and place in the savings or investment plans for kids.
A Penny save is a penny earned.

Step 5 : Execution

It requires discipline, but it is a one time pain exercise. You just need to go and open an account , linked Giro to your main account and off you go.
So start today!

The earlier you save, the lesser your burden in the future.

So my dear sons, remember this tip and start from Day 1





Disclaimer
This article is for information only. Please consult your own financial planner to assess your own individual needs. Every individuals have different goals and objectives and selected financial planning will differ from one to another.
All figures presented are based on estimation from various sources.


2 comments:

  1. I can see how expensive education is and how much further is it going to increase.
    But not much people think about this and always delay their savings and investing plans.
    Thanks for this informative article.

    ReplyDelete
  2. You are welcome. Just sharing what I know and applying to Parenting :)

    ReplyDelete