Among the Chinese, there is a saying: “再穷也不能穷教育”, which translates to “Education shouldn’t be sacrificed even if we’re poor”.
Parents believe that when their children are educated, they can secure a higher income and get better opportunities in life, allowing them to contribute back to the family and society in various aspects.
However, most parents tend to think they have sufficient time to prepare for their children’s education, and therefore prioritise providing their children with other “needs” such as bringing them for a luxurious vacation or other forms of entertainment.
Just like any investments, time can be your friend, or it can be your worst enemy. If you’re a parent with young children, why not start preparing the best angpao you can give to your children now?
To start planning for your children’s education fund, you should:
1. Estimate the cost of education
When estimating the cost of education, consider the following factors:
- The type of studies your child may pursue.
- Will you send your child to attend a local or an overseas university?
- How much is the basic cost of living should your child attend an overseas university?
Information on the fee structure and the overall cost of living are readily accessible on the internet. You can refer to this website to learn more about the fees and cost of education in Malaysia.
However, bear in mind that these factors may change over time. Review the plan at least once a year to keep yourself updated on the latest developments and be sure to get the information from various sources to ensure that the cost of education and overall cost of living falls within a similar range.
2. Understand your current financial position
Now you know how much is needed to reach point B (cost of education), to calculate how much you need to set aside every month to cover the shortfall, you’ll also need to know how much you currently have – point A.
Most people store their wealth in cash, properties, and other types of investments. You should ask yourself; what portion of the above-mentioned assets can be allocated for your children’s education?
For example, you may want to allocate 10% to 20% of your cash for the sole purpose of funding your children’s education. If you have investment properties, you may also designate a property to be sold once your child reaches 18 years old. Some may even have endowment policies with insurance companies that may mature in 20 years.
The key is to write down a list of assets that you will dedicate to its sole purpose of being your children’s education fund.
3. Determine how much is needed to cover the shortfall for your children’s education
In this step, we’ll use a free financial calculator to easily calculate how much you need to save/invest for your children’s education. You can access the calculator here.
(i) Enter the following field with the information you had prepared in Step 1 above.
(ii) Click on “FV”
The amount in the FUTURE VALUE box is the future value of the education cost that you entered.
In this case, the cost of education today is RM100,000. However, with an inflation of 4% for the next 17 years, the cost of education will increase to RM194,790.05 when your child is ready to enter university.
(iii) Update the “Present Value” and “Annual Rate” field
Next, you’ll need to calculate how much more is needed to cover the shortfall.
Using the same example above, assume that you have RM25,000 now and you believe that you can achieve an average of 6% return rate for the next 17 years, update the Present Value and Annual Rate (%) column.
(NOTE: do not refresh the website or change any other information.)
(iv) Click on “PMT”
The last step is to click on “PMT” to calculate the amount needed to save/invest every year to cover the shortfall in your children’s education fund.
In this example, you will need to save RM4,518.18 every year, or roughly RM400 every month (with a return rate of 6%) to send your child to a private university in Malaysia in 17 years.
4. Choosing the correct financial vehicle
There are plenty of choices when it comes to choosing an investment vehicle. However, we all know that most investment journeys aren’t going to be smooth sailing all the time, therefore it is very important to follow these three rules of investing:
Preserve your investment capital
One important rule that’s applicable in investing for children’s education is to preserve your investment capital. Sometimes, we can allocate a small portion of our portfolio to invest in high-risk investments. However, you don’t want to do that with your children’s education portfolio.
For example, in order to recover from a 10% loss on an investment, you’ll need to have an 11% gain to return to the original capital position, a 25% loss would require a 33% gain to break even, and so on and so forth.
There is no such thing as the best investment
In short, what’s good for me may not necessarily be good for you. Having said that, when it comes to investing for your children’s education, you may want to pay some attention to PTPTN’s National Education Saving Scheme (SSPN). Parents saving money into SSPN-I can enjoy tax relief of up to RM8,000 per year.
Keep your eyes on the prize
Lastly, keep your eyes on the prize. Always remember your why. Constantly review your investment strategy to ensure that you don’t receive any unfavourable surprises when your children are approaching the age to register for tertiary education.
5. Avoid common education planning pitfalls
Ignoring retirement planning
If you’re unable to cover the shortfall as calculated earlier, there are other ways to ensure that your children will receive a decent education, such as applying for an education loan from PTPTN or applying for a local public university.
However, there are fewer options available if you can’t cover the shortfall in your retirement planning.
Trusting the wrong “advisor”
Many fraudulent “advisors” use the element of fear and greed in parents to convince them to invest in their unregulated investment products. Should you need the help of a third party in the education planning process, please ensure that you engage a licensed representative.
Not reviewing savings and investments
I may sound like a broken record by now but reviewing your investments and portfolio at least once a year is very important. If needed, you should also rebalance your portfolio to ensure they meet the objective of providing X amount of money Y years later.
Saving for your children’s education is a long-term goal that may seem like a huge commitment at first. With a carefully planned strategy, and making time your friend instead of your enemy eases the process significantly. No matter how much or little the amount is, start today. The earlier you start, the better the compounding effect will be, because:
“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
This article was originally published at planNERD.
About the author
Marshall Wong is a licensed financial planner holding licenses from the Securities Commission Malaysia and Bank Negara Malaysia. He can be contacted through his website or email@example.com