Investing towards your children's education fund - Part 1

By Carol Yip
Thursday Oct 14, 2010

Ever wondered how our parents paid for our undergraduate education? Some of us attained our degree without our parents’ financial help, but it is safe to say that majority of us had help. For parents who had saved and paid for their children’s education, they worked hard and saved from their hard earned money. Some of them knew how to multiply their savings by investing in businesses, properties and shares, yet others merely kept their savings in the bank’s fixed deposits. Regardless, sacrifices were made to place us where we are today.

Nowadays, we face different challenges from those of our parents. Our more affluent lifestyles bring other concerns and worries about our future financial sustainability, including the ability to pay for our children’s education. It is obvious that we need to hedge our savings against the increasing cost of living and education costs for our children, but we don’t really know how to. Coupled with the unpredictability of interlinked global economies and fluctuating financial markets, we have a confusing mix.

Although we can use various financial formulas to project and calculate our children’s future education costs, there is no magical way to predict or compute accurately. There are many unforeseen situations such as:

a. Foreign exchange differences/fluctuation of future tuition fees and cost of living at college/university. 

b. Rise in cost of inflation of the country where the children will reside for their education in the future. 

c. To buy or not to buy a car when the child is ready to go to college? To buy an apartment nearby the college for child’s safety or to pay rental? If you decide to purchase property, where will the money come from – education fund or separate savings? 

d. Unclear about the type of education that the child wants – local or international school, local, twinning or overseas degree? Is a Master’s degree necessary in 10 years’ time? Do future job markets demand higher education for an entry job?

Human nature when it comes to investments
There is a certain irony about being human. We have almost limitless amounts of financial information and know-how available in the market place, including financial advisors to provide advice. Yet still, some parents struggle to save and invest for their children’s education fund. Why is that so? Here are some of my observations:

a. Procrastination to look for ways to save and grow money. 

b. Refusal to learn investment skills, financial education and literacy to grow savings and investment portfolio. 

c. Fear of taking risks. 

d. Not conducting regular reviews of savings and investment growth, at least on an annual basis. 

e. Using the wrong investment products/strategies and realising it too late when there is a need to cash out. 

f. Not increasing the absolute amount of savings to the education fund to cater for the increase in education costs and inflation rate. 

g. Experiencing panic when discovering that savings is not enough. Unless the earning capability increases as the children gets older, it is better to be frugal in spending and save more as early as possible.

It is understandable that children’s education is important for parents and no parents are willing to risk their life savings in investments that will not give the required growth to pay for future education costs for their children. Hence, it is a continuous effort for the parents to keep a close eye on the choice of saving and investment strategies.

No amount of financial education and advice can help unless parents work on their personal finances via ‘hands-on’ money management and investments.

Investment strategy that suits you
Your chosen investment strategy must suit your life’s situation and your ability to manage investment risks because it is a lifelong pursuit until the child is financial independent. You should nurture your investments with appropriate investing strategies to maximise capital appreciation. Possible styles include:

a. Choosing an investment product has capital growth and income yield over the long-term—property investments, shares with dividends, etc. 

b. Choosing a portfolio that consists of several types of investment assets that you can buy and sell for investment returns over a period of time—properties, unit trust, shares, gold bars and alternative investments. 

c. Choosing capital growth—business investments, company stocks, blue chip shares or private placement, venture capital investments, etc.

Since there are many possible investment choices, there is a need for a regular review of your investments’ growth. Constant review of the money set aside for your children’s education when the child begins his or her secondary level is important and more so when he/she progresses into Form 3 onwards. Even if the child is in college/university, continue to review your investment portfolio yearly. If the amount of growth is not according to the current trend of education costs increase, then you may need to restructure and/or find better investment alternatives. Continue to find ways to make more money when there is still time to do something about it.

Part 2 of this article will be published next Thursday, October 21st, in which Carol Yip shares property investment ideas for your children’s education fund and financial education at home.

If you have any ideas or feedback on this topic, share it with Carol Yip at carolyip@aboutmoneytalk.com