Thursday, October 21, 2010

Children education fund

Frankly speaking, I always thought that funding the children education is usually from either the usual hard earned money that we put in our saving accounts, buying education fund via insurance companies, education loans from banks, grow your money via varios investment schemes etc..But it never crossed my mind to buy property as another option to fund the children education buy as their future homes yes but never thought it could be used for their education purposes too where you are able to buy and sell just like shares..pardon my ignorance heee....Anyway, I find these two articles by Carol Yip from the Start Property an interesting read especially on the "Part 2" and on the financial education bit read on if you want to know more ;p
Investing towards your children's education fund - Part 1
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 investmentsThere 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 youYour 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.

Investing towards your children's education fund - Part 2

Property investments for your children’s education fund
You can save towards purchasing property as an education fund for your children in the future. Here are some tips.

1. Monthly saving, which is supposed to be saved for the education fund, can be used for loan repayment.

2. Select a well-located property for capital appreciation and rental income:

i. Rental income can be used for housing loan repayment while you continue your regular savings to build up a bigger pool for your children’s education.

The additional savings can be invested into other investment opportunities to grow your children’s education fund. You can create a diversified portfolio of investments to spread the investment risks.

ii. When there is a need to pay for children’s education in the future, 18 to 20 years’ time, the rental income can be used to pay for your children’s expenses when they are in college or university.

iii. When there is capital appreciation, the property can be sold for a lump sum (after housing loan settlement) to pay for your children’s tuition fees and monthly allowances.

Be creative when you invest in properties:

1. Buy one property for each child. It can be an apartment, house, shoplot or office – provided that it gives good returns.

2. Invest in a shoplot where you can rent out different floors or buy blocks of apartments or commercial offices for different sources of income.

3. Properties that are not sold for payment of education fees can be reserved for your retirement. It can even be given to your children as their wedding gift so that they can stay near you at your old age.

Financial education at home: Team work between you and your children
The ‘real value’ of investment is actually your children. They are your ‘lifetime investment’. The greatest return is when they value you as their parent more than money can pay for their education.

It is a team effort for the family – communicate with your children when you review the investments for their education fund. This way, your children are aware of your challenges and commitment towards having enough to pay for their education. At the same time, you are teaching them about the importance of financial planning at an early age.
Providing continuous career guidance and assessments when your children are growing up is important to ensure that you have invested your hard-earned savings in the right education. It is better to assess which career the child likes. Why pay for an education that they are not interested in? Make the right choice.

If the amount saved is not enough when it is time to pay for their education fees, there is a need to look for other degrees within your affordability limits. Your child has to keep in mind both the lump sum (tuition) fees and the monthly allowance required during college or university so that they can work with you to manage the limited savings for their education needs.

Financial stresses can affect your child’s studies. Your child needs to understand and live within these limits. If the issues are communicated clearly and approached as a family unit, a matured child will strive to study harder and find solutions for any financial difficulties. Scholarships, and/or a part-time job can help to relieve the financial burden.

Other important aspects of parenting:

a. Family lifestyle and values

The kind of lifestyle that parents expose their children to at a young age can impact how they behave in college/university. Parents have to think of the lifestyle that they have given to the children because it will directly affect how they spend their money.

Parents need to differentiate the savings for child’s education and lifestyle – like getting them a brand new car or secondhand car. The child needs to understand the priority of going to college/university is to get a degree and not enjoy a lavish lifestyle. They should take the public transport/share transport with college mates if they have to.

b. Teach your children about financial education – it’s free

Constant financial education and communication with your children about how to manage money at home is important. You and your spouse should advocate a frugal lifestyle – spend wisely, save smartly and quickly pay off any debts.

Soon, your child will understand that:

i. What is not used up for their education fund can be used to buy their first house or car. Money not spent comes in handy when they start their career and for your retirement.

ii. If there is insufficient money, they will know how to manage the limited resources and find ways to fund their education such working part-time to pay for their own living expenses or tuition fees. It is about knowing how to appreciate the initial financial support to embark on an education path.

iii. If there is a need to take a loan for their education fees, the child knows he/she is responsible to repay the debts.

In summary, even if you feel that it is the parent’s responsibility and obligation to give your children an education, it is just as fulfilling when you educate and teach your children important family values and good money management skills. These are important life lessons and skills that are not taught in our education system. So, teach financial education at home to prepare your children for today’s materialistic world.

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