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Child pressure on finance

The Star Online - Tapping the 50 Plus Market by Carol Yip

Saturday October 3rd, 2009


CHILDREN are a blessing, but the cost of raising a child can be enormous.

Needless to say, food, clothing and education are essential to the rearing of a child. The bad news – the cost of all three is on the rise.

Recent news states that families in the United States which earned between US$57,000 and US$99,000 spend roughly US$221,000 on child related costs. The figures came from a United States Department of Agriculture’s Centre for Nutrition Policy and Promotion report recently. Families which earn less will spend less money whereas families which earn more will tend to spend more on the child up to the age of 17.

The numbers calculated do not take into consideration the costs for child bearing and funds forked out for college or tertiary education.

Bear in mind, the sum of US$221,000 represents the cost per child, which means two kids add up to US$442,000 and three kids ... well, you know the maths.

Housing costs accounted for 33% to 37% of total expenses and, by far, make up the largest share. Food was the second most expensive category, at 14% to 19% of the total amount.

Similarly, raising a child in Malaysia or anywhere else can pressure the finances. In Malaysia, the consumer price index from January to August this year recorded notable cost increases amongst main groups with high weights namely food and non-alcoholic beverages, which surged 5.9% while housing, water, electricity, gas as well as other fuels that increased 1.5%.

Other increases over the same period were household equipment and routine household maintenance costs that was up 3.8%, restaurants and hotels services, which rose 3.5% while health as well as education, grew by 2.5%.

The bulk of any parent’s expenses of raising a child consists of having to finance their college or university education.

In Malaysia, the average tuition for four years at a local private institution, including living expenses, is RM68,520.

Meanwhile, tuition fees plus living expenses for four years at a local public university averages RM24,390.

On the other hand, parents wanting their children to pursue tertiary education overseas must be prepared to spend much more for this purpose, depending on the destinations.

These expenses cannot be ignored and parents need to consider the costs and how they will affect their own investment and retirement potential.

MyFP Services Sdn Bhd financial planner and managing director Robert Foo opines that as far as cost of living is concerned, the old adage of living within your means holds true.

“I’m not talking about exorbitant expenditure like buying luxury cars. Simple things like frequency of eating out and buying seemingly normal household assets you don’t really need or use,” Foo notes, “can fatten up the bills.”

Foo also observes that for a number of young parents, the free availability of credit cards is a bane.

“The seeming convenience of credit can turn around to bite families and disrupt their financial strength,” he adds.

He strongly advises that when using credit cards, make sure to pay off everything at the end of the month, as this practice would help curb one’s expenses.

Foo adds that besides having a clear budget that a family should adhere to, it is also important to regiment oneself in the handling of cash withdrawals for expenses.

“You should discipline yourself to withdraw a fixed amount once a week or forthnightly, so that you control the cash expenses. It is very easy to spend on cash purchases and expenses when you have too much cash in your wallet all the time,” Foo notes.

Besides that, young parents should also do an analysis of their high cost impact areas such as housing loans to consider restructuring and taking advantage of lower cost alternatives.

“Another thing is to look at your tax situation to see if there are ways to reduce your tax impact,” Foo adds.

Abacus for Money chief executive officer Carol Yip agrees that young parents, in their excitement, would tend to splurge on their children as they are very much influenced by their emotions, advertisements, peer pressure and in order to keep up with the joneses.

“Being first-time parents, I can understand the possible excitement and desire to give the child the best. But one has to understand, when kids are young, they may not understand or appreciate what is given to him or her,” Yip says.

She also asserts the importance of teaching children money skills like saving and investing for the future, which would assist in cutting household costs.

“Parents themselves need to practise this and once the child learns the good skills of spending, saving and investing from you, the healthy financial behaviour and attitude will become a life skill as he or she grows up,” Yip adds.

When it comes to family planning, financial planning is a must. Young parents should realise that the solution for financial planning cannot be found by just buying one product or a few products to meet the investment returns they need.

Investment requires the construction of a portfolio of investments where there is a well-researched focus on the risk as well as return characteristics of the portfolio, diversification and periodic rebalancing,

Unfortunately, Foo says: “Most people adopt a hit and miss approach in investing and most of the time, it is a miss.”

Carol Yip is a personal financial coach who is founder and CEO of Abacus for Money.

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