Education planning is something that all parents will have to prepare for at some point of their parenting. As long as parents do not wish for their child to take up a loan to pay for their studies, it's something that parents need to start setting aside funds for as early as possible.
When we consider how to go about education planning, I feel there's only 3 key considerations: how much to set aside, what instrument to use and what is the risk involved.
1. How Much To Set Aside
The amount to set aside is dependent on mainly how much time you have to prepare for this and the projected returns you will be getting for the instrument used. Basically, if parents are planning for their kids' university education and get started at age zero, they have the full runway of 19-21 years to prepare the funds required. If planning is done anytime after that, naturally the closer it is to the university going age would mean more money is required to be set aside per year from now till then. Most parents I meet tend to plan for studies in Singapore with the worst case being to take up a private degree. Education locally ranges from 30K - 50K SGD today which means parents would need to be ready to pay about 87K - 93K by the time their newborn reaches 19-21 years.
2. What Instrument To Use
Bank Accounts
There is a couple of ways parents can choose to prepare to set aside this money. The most traditionally known way is to save up in a bank account. Every month you can do a giro or diligently manually transfer a fixed amount into a savings account set up for your child's education.
Endowments
Another very common way people use to save up for education planning is through insurance plans known as endowments. The most common form of endowment would see parents sign up for a predetermined saving duration and then the plan pays out at a predetermined period. Nowadays there's another way to save which sees parents save for a predetermined period and the plan is principal guaranteed after a certain duration, parents can choose when to withdraw the funds anytime after this period with the maturity tied to their lifetime or their kids lifetime. Good endowment plans typically preserves the value of money but cannot make a person rich.
Investments
The third way to save would entail putting a regular sum of money in either stocks, bonds, ETFs, unit-trusts or investment-linked policies. This form of instruments tend to give an even higher return because an investment instrument has an uncapped downside which also means an uncapped upside. The general sense why people are open to this approach is because most markets trend upwards in the long-run and putting a regular amount in utilizes the function of dollar-cost averaging.
3. What Is The Risks Involved?
Bank Accounts/Deposit Accounts
Generally these accounts will not jeopardise your capital in anyway. The only risks are opportunity costs due to typically low interest rates and its easy access may also result in easy withdrawal. Basically, most of us tend to claim that we will be sufficiently disciplined to save up for a specific purpose. However statistically it's proven that humans will take funds from their easiest accessible accounts first followed by their next liquid asset when they want to buy stuff or need money. Also, because of low rates, there's no utilization of compounding effects which might thus require a larger saving amount on a monthly basis to get the same end result.
Endowments
Personally I'm a strong advocate of endowment plans for children education planning. First of all, it forces people to stay committed to their saving habits. If you terminate the plan after you sign up for it before the point where you breakeven, you basically lose money. It thus forces people to stay committed to the plan they took up. This ensures that for sure if you save for x number of years, you know you would have saved x amount in this instrument. It offers certainty. Secondly, it offers a protection element. If the plan is put in the kid's name, even upon death of the parent, a premium waiver can be put in place to ensure that the funds are still set aside for the kids when they reach university age. This is something that traditional savings accounts or investments cannot ensure. Thirdly, if you take up endowments which matures at the lifetime of the parent or the child, basically it ensures that if the funds are not used when the child reaches university age, it can double up as a retirement plan and not have to deal with reinvestment risk. Of course there's no free lunch. It comes with a commitment period and if the commitment is not fulfilled, you will lose money. There's usually no liquidity prior to the breakeven point so the money set aside must really be something that is for future use.
Investments
Some people prefer using investments to save for education planning. This is because investment instruments generally offers the highest return among the instruments discussed here. This means parents can use lesser money to get the same outcome. Most investments are generally liquid so it also offers flexibility. Having said that, flexibility is also the biggest issue in planning for life events. Going to school at a certain age is pretty much a certainty. Having an instrument that is flexible might result in early withdrawals, termination of a commitment earlier than expected and essentially putting temptation in the way. Another potential risk is a lack of guarantee. If you happen to make a wrong investment or if the year your child goes to school happens to be the recession year, you might withdraw your funds while it is in deficit.
If you wish to know more about the methods discussed in this article, you can reach out to me using the message board under "Let's Talk".
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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