Parenthood comes with much responsibilities. You have to care for your child’s health and physical needs at every age, impart knowledge and good values, guide them through difficult situations, and, of course, plan for their futures. This may not be easy, especially when you are mired in your everyday life, working and planning for your own investment and retirement needs.
One important area you cannot ignore is to plan for your child’s future tertiary education. Studying in Singapore is not cheap, and many parents would need to proactively save towards it to be able to put their children through tertiary education.
According to a Straits Times report in 2016, the cost of each academic year in university is at least $8,000. Hence, a 4-year local degree programme would cost a minimum of $32,000. If you include living expenses such as accommodation, food, transport and allowance, this can easily sum up to $60,000 over a 4-year period.
But planning for your child’s education isn’t just as simple as trying to save toward the $60,000 mark. There are other crucial factors that you need to consider as well.
1. Inflation
The cost of a 4-year local degree programme, inclusive of living expenses, may be about $60,000 today. However, this is in today’s money and if one thing is for certain, it is that inflation is going to make tertiary education even more expensive in the future.
Even with a conservative estimate of a 2 per cent inflation rate each year, we are still looking at a projected figure of $89,000, or nearly 50 per cent higher, in 20 years’ time. If you intend to send your child overseas for further education, this figure would shoot even higher.
So, while planning for your child’s education, do not forget to factor in inflation into your calculation. If you are unsure about how much you may need, consider talking to a trusted professional who can assist you in working out the sum and getting you started on a sound financial plan to achieve that sum.
2. Invest to grow your savings
Diligently saving up each month so that you have close to $89,000 at the end of 20 years for your child’s university or other tertiary education may seem like a safe and simple way to build up your savings. Yet, this is an extremely inefficient way of accumulating money.
Instead of saving and keeping your money in a savings account that pays a very low interest rate at your bank, consider making your money work harder through investing so that you can earn a higher return.
When you invest for a higher return, you naturally take on more risk. For the uninitiated, this may appear daunting, nobody likes the idea of taking risks with money that is meant for their child’s future education.
Yet there are ways to reduce the risks that you are exposed to. One way would be to have a longer investment timeline. By taking a long-term approach with your investments, you will be able to ride the highs and lows of the market, giving you a higher certainty of getting the returns you seek.
Alternatively, you can also consider a long-term savings plan such as the AIA Smart Growth (II). With this savings plan, you only need to save for 12 years while your savings continues to grow even after you stop contributing to it. The savings plan provides both a guaranteed return and also a non-guaranteed portion. Hence, you can enjoy the certainty of savings for the future while possibly getting more in return if the investments within the policy pans out well.
3. Adjust your portfolio depending on your timeline
Portfolio management is particularly important when you are planning towards expenditures that have fixed timelines. It could be saving towards a wedding, a home renovation or in this case, planning your child’s future education.
Since you have visibility of when you would require the money, you have to ensure that the money is protected as the date draws near. You cannot afford a situation where 50 per cent of your portfolio gets wiped out due to an unpredictable economic crisis just before your child needs the money to enroll into tertiary education.
If you are investing on your own, you may need to reduce your risk appetite as your child’s tertiary education date draws near. Investment plans run by professionals, on the other hand, will automatically take your policy maturity into account when investing hence ensuring that you receive the promised returns.
Save and invest based on what you are comfortable with
Saving and investing towards your child’s future education is a long-term plan that you need to be comfortable with.
For a start, you need to consider how much you can comfortably save each month without putting a strain on your finances. You also need to consider how inflation will impact your actual financial needs in the span of two decades. The next step is to make your money work for you by understanding how much risk you are willing to take on with your savings in order to earn a higher return. Lastly, once you have embarked on your financial plan, you need to ensure you will be able to achieve the end goal by taking less risks with your money as your timeline draws near.
This article was contributed to us by AIA Singapore
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