The 3-Step Process I followed to secure my children's futures
Saving For College, Secure Your Child's Future

The 3-Step Process I Followed To Secure My Children’s Future

It all started with me wanting to give ‘The Ultimate Gift’ to my kids. The same gift my father gave me.

But I didn’t know what careers my kids would choose when they grew up, but I knew that higher education would cost a bomb.

Soham is 12 years old today, and Anjali is 7. 

When Anjali was 3, I started saving for her college education fees. This is how I went about doing it.

Step 1 - Set the right savings goal

I researched the average cost of 4 years of graduate studies and cost of living, in different countries as appropriate.

The average costs for 4 years of college (and cost of living) in these countries were as below:

  1. U.A.E. - USD 80,000
  2. U.K. - USD 160,000
  3. U.S.A - USD 265,000

Since, I had to choose one savings goal, I decided to err on the side of caution, and aim for the cost of studying in the United Kingdom (U.K.) i.e., USD 160,000 for 4 years of graduate studies and cost of living and traveling.

Then I had to allow for the effect of inflation. Like everything else the cost of education goes up each year. In fact, the cost of education goes up by an average of 5% every year.

In Anjali’s case, there were 15 years to go before she turned 18. That meant the costs would double at the rate of 5% per annum, i.e., I would need to pay USD 320,000 for 4 years of college education in the U.K.

Step 2 - Figure Out What Needs To Be Done

After identifying the savings target, the next step was to decide whether I wanted to save on a monthly or one-off basis (lump sum). 

Most parents I know preferred to put aside a small amount each month, which is what I preferred as well.

There were two ways to do this:

  1. Back calculate from the USD 320,000 and see how much I needed to save at an assumed growth rate, or
  2. Start with an amount that I was comfortable to begin with for e.g. USD 1,000 or 1,500 per month.

I have developed a simple calculator for this which you can access here.

Step 3 - Figure Out Which Savings Plan Suits Your Goal

The next step was to select the right savings and investment vehicle towards this goal, and this needs the help of a qualified and independent financial advisor. 

I did this myself, as I am a financial advisor and I suggest you save some time and effort and get qualified financial advice before you begin.

A qualified financial advisor will help you select the right savings/investment plan for your goal, and

also the term you need to save for, going forward.

These are just the basics. Then he will select where your money will be invested specifically each month or for the lump sum, and look after your savings plan for you, till you need the money.

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My Father’s Ultimate Gift To Me
Saving For College, Secure Your Child's Future

My Father’s Ultimate Gift To Me

Saving For College Education

My father was a self-made man. He grew up in a very poor family. His condition was so dire that he lived on hand-me downs from his friends and class mates, as he couldn’t pay for his books and school fees himself.

He would borrow books from his classmates after they were done studying, and then study through the night to catchup on that week’s topic in school. He knew he had to score the highest marks in school to qualify for the scholarships. These scholarships then paid the fees which his dad couldn’t afford.

This was his story growing up in school, and even through college. He became a metallurgical engineer and completed his PHD in statistical analysis on his own. He paid for his own education through scholarships throughout his career.

He did not study in the best university growing up, and there were no campus placements or interviews in his time. He had to find a job and start from the bottom of the ladder and work his way up. In the end, the highest position he ever held was ‘General Manager’ in one of the TATA group of companies. 

He found it hard to succeed because he hadn't studied in one of the best universities.

When he died in 2007, I cried the most in my life, as I had lost my role model.

My dad and brothers

My dad and brothers

What I remember growing up was his constant push to make me better than him. He always stressed a lot on the importance of a good education, and wanted me to have the things and lifestyle that he didn’t get. 

In short he wanted me (his son) to be more successful than he ever was. He made sure that I got the best education (he could afford) by cutting down on his own lifestyle and spending.

I still remember him doing his consultancy work after office hours (every day), to earn extra money to send me to university.

In the end, the money he made just enough to pay for my MBA in the Australian University here. 

By sending me to a good university, my father had given me the ultimate gift... the gift of a good education.

I believe where I am today, and the level of success I have achieved so far, is mainly because of him.

My son Soham was born 6 months after my father died. Every time I look at Soham, I get reminded of my dad somehow. I feel his spirit has lived on through him.

My daughter Anjali was born 5 years later, and my goal for both of them, is to pass on the ultimate gift to them.

I want to give them a higher platform and opportunities than I ever had, and instill in them the same drive to succeed.

I want them to be more successful than me. 
Soham and Anjali

Soham and Anjali

This is one of the reasons why I talk so passionately about ‘Saving For College’ to others. Sure, I don’t know what career they will choose, or what university they may want to study in, but there is one thing I know for sure. 

When they reach the age of 18, and say ‘Dad I want to choose this university’, I should be able to afford it. Because, the only other thing I could say is ‘Son, choose another profession as I cannot pay for this one’. That’s not what I want. 

Imagine a life where my son goes through life stuck in a dead-end job which he doesn’t like, in a career that wasn’t his first choice. 

That would be awful isn’t it? I wouldn’t want my kids to work in a job they don’t love. 

After all, it was Steve jobs who said, ‘The only way to do great work, is to love what you do’.

As a financial advisor, I followed this ‘3-Step Process’ to secure their future.

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Parents need around Dh1 million to cover lifetime education fees per child
Build Wealth, Saving For College

Parents need around Dh1 million to cover lifetime education fees per child

I came across this shocking article in Gulf News about the amount of money need per child for education fees. 1 million dirhams is more than the price of a Ferrari Maranello. The summary of the Gulf News Article is below.

Have you started saving yet? If not, check this article on ‘The guaranteed savings plan I took for my daughter’

Excerpt from the article in Gulf News

Couples who are still planning to start a family in the UAE need to start saving as soon as possible, with lifetime education costs per person estimated to reach approximately Dh1 million, enough to buy a small flat in Dubai.

Zurich Life has looked at the tuition fees at various schools in the country, as well as the related expenses incurred by parents, and calculated how much a household spends throughout the educational lifetime of a child. The resulting figure is a whopping Dh933,945.

“A typical family with two children could look at spending as much as Dh2 million on education,” said Amrita Sethi, head of marketing and communications for Zurich International Life, Middle East.

“While some employers in the UAE contribute to education costs at primary and secondary level, the majority of people are left having to pay these costs themselves, with 70 per cent of parents funding their child’s university education from day-to-day income,” Sethi said, quoting a research done by HSBC.

The estimated amount of lifetime education expenses is based on current costs and does not include compound interest rates. It covers 14 years of studying, from pre-school, primary school, secondary school to university.

Upfront education fees during pre-school alone could add up to Dh58,693.

By the time the child reaches primary school, parents should prepare to spend about Dh211,382 for a total of six years. At the secondary level, school fees for six years could set a family back another Dh258,315. For university, expenses can vary depending on where the child prefers to study.

UAE-based universities can cost Dh76,492 per year, much higher than the annual fees in the United Kingdom (Dh57,000). For US-bound students, the cost can go higher to Dh84,428 per year.

Then there are related expenses to prepare for when the child goes to university. According to Zurich, basic living expenses, including food, utilities, travel and daily essentials can reach Dh234,551 per student over three years. The figure is based on the average expenses incurred by a student taking up a three-year course in the United Kingdom.

“It’s a huge expense that, without proper savings and financial planning, is very difficult to meet and often at the opportunity cost of planning for other important goals, such as retirement,” added Sethi.

Parents are, therefore, advised to immediately kick start the habit of saving and plan accordingly before school-related expenses pile up.

“Committed financial planning will help families achieve these important saving goals. We are advising parents to start their savings plan today, if they haven’t already. Spread the costs over the long term with the help of a financial advisor and remain disciplined and committed to your plan at all times,” Sethi told Gulf News.

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The Guaranteed Savings Plan I Took For My Daughter
Case Studies, Financial Planning In Dubai, Saving For College, Savings Plans

The Guaranteed Savings Plan I Took For My Daughter

On the 28th of April 2016, I started a savings plan to save money for my daughter’s higher education fees.

As an independent financial advisor myself, I was faced with the decision of choosing between all the different providers of savings plans that are available in the market.

I used the following factors to evaluate and choose the best savings plan for me.

Principle Protection

  1. The S&P500 Index savings plan from Investors Trust is one of the two principle protected plans available in the U.A.E., that are ‘principle protected’.
  2. ‘Principle protected’ simply means that my capital is assured. The S&P500 Index savings plan assures that at the end of the term, the capital plus 40% (140%) is assured as the worst case scenario.

Fine print – This is subject to me contributing all the premiums over the full term.

This means that I have to ensure that I don’t miss any premium at all. While this may seem inflexible, I can pay future premiums in advance to avoid losing the guarantee.

I prefer this plan over other plans in the market, that provide no principle protection whatsoever. Moreover, with other savings plans, I could get back less than what I invested.

Market Participation

This product provides me with 100% market participation. This means that I get the actual performance of the market without any limits on the growth.

Underlying Investment

  1. Other savings plans in the market such as Vista from Zurich International Life, or Premier Advance from Friends Provident International, or Vision from Generali International, etc…, offer mutual funds as the underlying investments.
  2. While there is nothing fundamentally wrong with mutual funds, the fact remains that mutual funds are subject to market risk and have to be chosen correctly. The key here is ‘mistakes happen’ when selecting mutual funds.
  3. Wrong choice, now or in the future, could lead to losses in the portfolio.
  4. The S&P500 Index savings plan offers the S&P500 index as the underlying investment choice.
  5. There is only one variable that could affect the performance of the portfolio, which is the S&P500.
  6. This plan works without intervention from the plan holder or the financial advisor.

The advisor cannot make mistakes, causing you to lose money.

The S&P500 is simply a numerical index that gives the average performance of the top 500 stocks in the US stock market. I like the simplicity of this investment.

I don’t have to pick and choose anything where ‘mistakes could happen’.

Moreover, Warren Buffett himself advocates the S&P500 as the best investment to everyone including himself.

Not only that Warren Buffett has famously wagered a million dollars on the performance of the S&P500 over the best hedge funds in the world – Protege Partners.

This was a 10-year bet which is into its 8th year and Warren Buffett is right so far. The S&P500 has beaten the hedge fund in overall performance in the past 8 years.

Performance of the S&P500 Index

Historical performance matters even though it may not be an indicator of future results. All I did was look at the 25-year performance of the S&P500, and my mind was made up.

The S&P500 has averaged 12.98% per year over the last 25-year period.

Charges

There is a saying in life that you get what you pay for. This product is slightly more expensive as compared to the other savings plans in the market. But there are three factors that made me choose this product over the others.

  1. Principle protection of 140% which the other products don’t have, and
  2. Index fund – S&P500 that has actually outperformed any of the funds in the market over 25 years.
  3. Warren Buffett (one of the richest man in the world recommends it)

Term – (number of years)

The S&P500 Index Savings plan is only available for a term of 15 years. While others might find this unsuitable for their savings and investment goals, I found this perfect for my goal of saving for my daughter’s education.

She is 3 years old and I have exactly 15 years before I have to shell out approximately USD 320,000 for her higher education fees.

Specifics of my investment

My investment details are as below:

  • Monthly Contribution – USD 1,000
  • Term – 15 years
  • Total contribution – USD 180,000
  • Minimum Guaranteed amount (after 15 years) – 140% i.e., USD 252,000 or actual market performance.

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How many Ferraris are you paying for?
Build Wealth, Saving For College

How many Ferraris are you paying for?

The Ferrari 458 Italia costs $229,825, and the Ferrari California costs $192,000. On an average a Ferrari costs around $200,000.

So what does this have to do with anything, and why am I discussing this on a Financial planning website? Simple.... $200,000 is what it costs today to raise a child and put him/her through a good school and a decent university that will help them be successful in life.

Education Fees in the United States

US university fees make a lot of headlines nowadays, usually involving a string of rather daunting five-digit numbers. According to one report, the average cost of studying at a four-year private (non-profit) university in the US is now US$28,500 per year.

Of course, that’s only the average. At the top end are universities such as Cornell, which in 2011-12 is charging undergraduate fees of $41,541. Additional budget advice includes $7,800 per year for accommodation, $5,354 for food, $800 for books and resources, and $1,630 for other expenses, making a total of $57,125.

That means one year alone would cost significantly more than the average US annual salary, which was less than $40,000 in 2010. Multiply by four for the full course and, for most people at least, going to university in the US starts to look about as realistic as crashing at the White House while you look for a place of your own.

Education Fees in the United Kingdom

The United Kingdom is not cheap either when it comes to University Fees. Compared to the US, the fees are about 15% lower but still quite high.

Tuition fees for international students (2011)

Subject£ Sterling
Humanities and Social Sciences£9,000–£10,800
Sciences and Engineering£10,200–£13,800
Clinical subjects£23,200–£26,000
  • Some international students may be exempt.

So if you have two kids, you have just bought yourself two Ferrari's worth of education costs.

How are you preparing to secure your child's future?

Sources -

  1. US University Fees
  2. UK University Fees

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Build Wealth, Saving For College

Education Plan – Dos and Don’t s

When doing finan­cial plan­ning, one of the most impor­tant top­ics of dis­cus­sion is how to create the right education plan for your child..

The cost of edu­ca­tion is on the rise, advanc­ing far in excess of the infla­tion rate. There­fore, it is essen­tial to plan for the future by starting an education plan for your children as soon as possible.

As a par­ent of a naughty 4-year old, the first thing I did when he was born was to start an education plan to help me save for the higher education fees that I would have to bear around 18-20 years later.

I started the education plan with the pur­pose of having a dis­ci­plined monthly com­mit­ment – an assur­ance, that by the time my son is of ter­tiary edu­ca­tion age, there will be a sum ready for him to pur­sue fur­ther stud­ies, whether locally or overseas.

When to start your child’s education plan

Some may ask how soon they should start the plan­ning process. The sim­ple answer is as soon as pos­si­ble.

Starting an edu­ca­tion plan­ involves an invest­ment strat­egy that specif­i­cally addresses the edu­ca­tional needs of your chil­dren. It’s impor­tant to start sav­ing early to reduce the funds required by tak­ing advan­tage of the power of com­pound­ing over time.

Important Factors to consider when starting your child’s education plan

Plan ahead when starting an education plan 

Designing the right edu­ca­tion plan­ is a long-drawn process; the time period could range from 15 to 20 years. Start to pri­ori­tise your finances early to give your­self a head-­start. This allows you to ben­e­fit from the com­pound­ing effect of money and the flex­i­bil­ity to change course accord­ing to your lifestyle changes.

Your invest­ments will also ride out the volatil­ity of dif­fer­ent mar­ket cycles over a longer period.For exam­ple, my wife and I started our son’s edu­ca­tion plan even before the birth of our son, and we worked out the finances and the amount that would be needed to fund his future edu­ca­tion. We took into con­sid­er­a­tion whether we wanted a local or over­seas education. We had to rework our pri­or­i­ties and expenses to cater for this change.

Invest­ment options for your education plan. 

One of the most pop­u­lar choices among young parents is to buy an endow­ment education plan. This is a prod­uct that cov­ers two objec­tives – sav­ings and pro­tec­tion.

For exam­ple, a 30-year-old par­ent plans to buy a 20-year edu­ca­tion plan for his new­born baby boy. His monthly pre­mium of about $450 (for sum assured of $100,000) would poten­tially bring him an approx­i­mate pol­icy matu­rity value of $200,000. Even if this par­ent is to just set aside $100 each month towards such a plan for 20 years, it is likely to gen­er­ate a pol­icy matu­rity value of approx­i­mately $40,000 – enough to cover tuition fees in a local university.

On the other hand, par­ents who are savvy with finances will con­sider starting an education plan that par­tic­i­pat­es in the equity mar­ket for a poten­tially higher upside. Some will go for high div­i­dend stock while oth­ers look to cap­i­tal growth. Regular savings plans with offshore funds can cater to those who wish to par­tic­i­pate in the mar­ket with­out hav­ing to actively man­age the port­fo­lio.

Cou­pled with a protection/savings and invest­ment strat­egy, this can be an ideal choice for par­ents to achieve their goals. There­fore, early plan­ning pro­vides flex­i­bil­ity and the oppor­tu­nity to opti­mise risk return on the strat­egy cho­sen. We chose a savings/protection education plan while putting aside funds to invest reg­u­larly in the mar­ket in a few hand-picked high-dividend stocks.

Protect your education plan.

Many couples overlook the protection aspect when starting their child’s education plan. Life is about eventualities and risk. The risk of dying to soon and leaving your family to fend for themselves and the risk of living too long and having to save for your expenses. While the savings education plan takes care of the ‘living too long problem’, parents should take out a separate term insurance that ensures that their children can have the best education even if they are not around or die too soon for any reason.

Being dis­ci­plined with the education plan. 

Not every fam­ily can afford to invest a lump sum to finance a child’s edu­ca­tion years down the road. There­fore, hav­ing the dis­ci­pline to save on a monthly basis, often through a reg­u­lar savings/investment plan, is a good strat­egy to begin with. Stay focused as it is often easy to find excuses to dip into the sav­ings if you do not have a ded­i­cated account or strategy.

There is a sense of com­fort and peace of mind know­ing that children can secure their pre­ferred edu­ca­tion choices down the road. All it takes is early plan­ning, a com­fort­able and real­is­tic sav­ings and invest­ment strat­egy, and more impor­tantly, dis­ci­pline in keep­ing to the finan­cial com­mit­ments set aside for the edu­ca­tion plan.

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