On occasions I do get a nudge from good friends seeking some financial advice and in a day 2 person have discussed with me plans and ideas regarding saving for their child’s tertiary education in 20 years.
The first discussion was more regarding whether to make use of the STI ETF as the wealth machine to build up the sum for the education versus that of insurance endowment. There wasn’t a straight forward answer but I hope it has been fruitful for him to make a good decision on this.
The amount you required to build up in 20 years
There should be much questions on what should you really care or think about when it comes to building up the child’s education fund. I felt that the first question is how much do you need.
This will largely depend on the inflation rate which affects the sum of money required in 20 years time, do you need the money paid out at different juncture, plan for local or overseas and how much does a university degree cost now.
With this figure, you can then work out the figure in 20 years time.
In a previous article on getting your child to pay for his own university, we have identify the current 1 year cost is $8,000 for a local degree. So for 4 years we are looking at $32,000.
Taking a conservative 5% inflation rate, in 20 years, your child’s university fee are likely to reach $85,000.
How much you need to put away to build up this amount
To build up to $85,000 in 20 years time, you can put your money in various wealth building methods. If we do not go into that discussion, we can generically say different wealth building methods produced different annual compounded rate of return.
The table above shows the different rate of return and the amount required to channel to building up annually and monthly.
You will notice that the monthly amount is manageable at $354 versus $214 between a 0% return and a 5% return. That is the difference between your money rotting in a 0.05% savings account and using the STI ETF as your wealth building method.
Even with a 5% return you still need $214.
The take away is this: What is important is to establish that commitment. That discipline. That automation to channel a sum of money monthly to reach $85,000. Even if your money rots in a separate savings account, you still reach your end goal. Even if your returns are great at 6%, you still need to put away $192, which is 56% of the amount required if the rate of return is 0%.
If you don’t start, you are going to regret it later as you need a much larger amount from your take home pay to fund the education. By then you may not have the flexibility to allocate more due to more demanding life.
Save your increment for this
If you cannot free up more money from your expenses to save for the child’s future education, consider saving your increment instead. A couple earning $3000 each and taking home $2400 each can have $144 increment per month combined at a 3% increment rate.
Instead of lamenting this small amount is rather useless, funnel this to your child’s tertiary education. It creates lesser impact on your current expenses, and you don’t have to wreck your brains what to cut.
Automate channelling to your Wealth Fund
By using higher return assets like insurance endowment or an exchange traded fund like the STI ETF, you can build a larger education fund, providing more flexibility 20 years later. However, you do not have to be ‘forced’ to make a decision by your insurance agent or broker.
You can set up another bank account 2 which you funnel part of your take home pay deposited in bank account 1 to be used to pay for the insurance policies or other assets.
Almost all banks lets you set up a automated scheduled transfer, which you can set up on your pay day on the 15th before you use the money. Better yet, transfer the expenses money to a bank account 3 and only spend bank account 3.
This way you know that, if you channel $354.17 to bank account 2 automatically for 20 years, you are more or less set. Remember, don’t create a credit card, debit card, ATM for that account. Make it difficult for you to tap that money.
Buying an insurance saving plan is not the most important point
There is an invisible narrative that to save for your child’s education you need a children insurance plan. I believe there is very little special between an education savings policy and a traditional savings policy.
Across all different companies, the insurance policy tend to be apples, oranges and pears. They don’t want you to compare and you will realize they have some different little features. If we categorize them, it is whether they have pay outs every x years, how many years you need to service the premiums.
The above table comparison is generated from DIYInsurance.com.sg , where you can compare across various traditional insurance savings plans, but also children’s savings plans, then buy them from DIYInsurance.
The crux here is that what they tried to do is to use the projected (meaning they say with assumptions you will get so much, in actual fact your mileage may vary) returns of each policy to generate the Internal rate of return (IRR) to get a fair dollar value comparison. IRR computation is what we are taught in finance to compare different kind of assets and evaluate which one yields a better return (e.g compare a golden goose to a donkey)
Projected wise almost all returns are around 3.7%. This coincide with my table above that you need to contribute $250 per month to reach your goal. That is just a difference of $100, which is not very significant for middle income household.
Focus on the important thing here, which is getting started and setting up a sound automated bank account transfer plan and you should not be too far off track. If you have difficulty, pledge your future increments towards it. But perhaps learn to live more frugally for the sake of your child’s future.
What i felt is more important is to bring up children with character, humility and perseverance and with that you get children that they may be able to fund their own education.
Talking is easy. Doing is another matter all together. Kyith salutes all parents making efforts bringing up their children in each of their own way.
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Monday 25th of July 2016
I bought endowment for each child born so three children three endowments. to protect against early departure of human asset.
Dead human asset can't invest no matter how good when they are alive. :-)
Thursday 26th of March 2015
Hi for me i would manage another way. Instead of having a separate portfolio for retirement, education, reno, etc, i would just invest the required amount, or as much as possible, to 1 portfolio of stocks and bonds, e.g. 60/40. When the time comes to pay for the education, use new monies then and withdraw from this portfolio the required balance.
Withdrawal would be according to the usual rule: withdraw from the winning asset class at that time.
Thursday 26th of March 2015
momo, actually your approach is the most sound, since money is funigble. it works for folks who have a deep understanding of how money works and compartmentalize on the fly.