Planning for your Child’s Education Part II By Nimi Akinkugbe as a continuation to Planning for your Child’s education series, here for Part I.
“Save now, or you’ll pay later”
Many parents pay school fees on an ad hoc basis without any advance planning. With the rising cost of education, if sound investments are not made now, covering the huge expenses in the secondary and post secondary years may be a challenge. When your child is still young, you have the benefit of time to select investments that offer the prospect of higher returns. In addition, compounding provides the advantage of additional earning on the interest and/or capital gains on your investment.
What are your options?
Consider the available options, and identify the risks involved in each before investing. Money market deposits offer you a low risk option but the returns hardly keep pace with inflation. In order to accumulate enough money to afford the educational costs in the years ahead, you need to not only start early, but to invest fairly aggressively. After their recent experiences, many people are still nervous about investing in the stockmarket, yet it is generally regarded as the best option for long term investing; in the short term it can be volatile. If your time frame is over ten years, you may consider investing a significant part of the money in the stockmarket. An equity fund will offer you diversification by spreading your funds across a carefully selected range of stocks.
As the time draws closer, the less risk you can afford to take and the preservation of capital takes precedence over the prospect of high returns. It makes sense to begin to shift the funds into more conservative investments such as bonds and then money market assets to carefully secure the fees when they fall are due; you would thus have gradually moved away from the volatility and risk of stocks toward a lower volatility of bonds and the relative safety of money market assets. If you leave the money in the stock market until just before you need it, you may be forced to sell stocks at a loss.
Do you have any assets?
Real estate is an asset class that performs well in certain locations. It provides three main sources of funds; a property can be sold, you can apply the rental income to pay tuition and other costs or release part of your equity.
It is only the highly paid or well off that can afford to fund the full cost of tuition upfront. For the vast majority of people, additional sources of funding are required. Unsecured loans can be made available for relatively high income earners in full time employment, but it is more common to secure a loan against your property or other high value asset. You may be eligible to borrow a percentage of your equity, which is the difference between the market value of your property and the outstanding mortgage loan. Be cautious as you consider debt, as paying interest on a loan can significantly increase your education costs and if you default, you could lose your property.
Scholarships and grants are often overlooked by parents as a source of education funding. From your child’s earliest years you may have identified a unique skill or talent or they may be exceptionally gifted academically making them eligible to compete for a scholarship. Nurture their talent and seek to develop it but at the same time, be cautious about pushing too hard as you might be demanding a performance level in your child that they may not yet be capable of producing, leading to frustration.
Scholarships sometimes have strings attached and may be tied to a particular field of study or may require that a certain standard of performance is maintained. They often cover less than half of all costs so you will still have to come up with the difference.
Will your child have to contribute?
For many families it is the norm and an economic reality that children contribute towards the funding of their university education by working full time and taking advantage of distance learning opportunities or part time courses. It is important to teach economic responsibility from a young age and such earnings can supplement whatever you are able to provide towards living expenses. By encouraging them to invest in their education, you will also be teaching invaluable lessons in personal financial management.
Keep your retirement plans in view
Your child’s education is likely to be your greatest priority, but do not neglect your own retirement plans; if these fall short, you may find yourself financially dependent on your children. Don’t be tempted to withdraw money from your retirement savings account other than for your retirement, as it could jeopardize your ability to maintain your own future financial independence.
Insurance is available to protect your child’s education. Tuition protection plans are designed to provide you with the peace of mind of knowing that your child’s education will be secure and can continue unhampered in the event of a loss of employment, permanent disability or the demise of the parent or sponsor.
It is important to bear in mind that there is no one solution; each investor’s circumstances are different. Seek professional advice; an investment advisor will carefully consider your own unique family circumstances and goals and assist you in making the most appropriate decision, taking into account, your income, your child’s age, your risk tolerance, your investment time horizon, and the amount you wish to save. With a disciplined and systematic approach to investing over time, you will be able to accumulate a significant sum in your child’s education fund. The sooner you start investing, the better.Written by Mrs Nimi Akinkugbe, Lagosmums money management and financial specialist. For further questions or advise send email to [email protected]