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.
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.
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.
Amit is an Independent Financial Advisor, based in Dubai since 1997. He is part of the prestigious ‘Million Dollar Round Table’ (MDRT), which is an elite club of the best financial advisors worldwide.
He has authored the ‘6-Step Financial Success Guide’, and the book ‘Creating, Preserving, Distributing Wealth’.
He helps business owners and professionals ‘Create A Second Income’ through investments.
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