04/08/2016
Do It Yourself Educational Plan for Your Children.
Mostly people my age (middle 20s to late 30s) have already started advancing in our careers and at this point, we already know that we have to take control of our finances and earning. For most of my peers who have starting raising their own families and contemplated about their children’s future, investing in college education and how they will pay for it is really a big concern. That is how we love our children. Over the years, the general trend for college tuition costs is always rising by 10% every year. These colleges and universities are allowed by the law to increase their tuition fee subject to the regulation by the Commission on Higher Education. School institutions do not have the privilege of increasing their miscellaneous fees without consulting the members of both the students and the academe first. So these tuition fee increases are really beyond the control of the parents. What they have to do now is to find ways to PLAN AHEAD and SAVE for their children’s college education. But before planning head, the parents should take into consideration some information before achieving their tuition fee goals for their children. 1. Which type of school do they intend to send their children? Public or private? 2. How much is the tuition fee cost? 3. The current age of the child so parents will know how many years will it take for them to save before their child enters college? 4. Multiply total cost by the inflation factor rate of 10% corresponding to the number of years the child enters college. 5. Compute how much money to save and invest until the child reaches college level. 6. Look for an investment tool which will help grow the money to meet target fund in the near future. For example, a college tuition fee in De La Salle University is P150,000.00 annually. A parent who has a 4 year old son will enter college at age 18, which will give his parents 14 years to prepare and save. If the annual increase in tuition fee at present and in the future is assumed at 10%, the total education fund needed is almost estimated at P3 million. When you break down P3 million in fourteen years, a parent has to save and invest around P120,000.00 yearly assuming the average investment rate is at 10%. So the question now is how will parents fund these big amount of tuition fee which will span in 14 years? Here are their options :
1. Mutual Funds
According to Investopedia, a mutual fund is an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Going back to our parents’ tuition fee planning example earlier, if they only have 6 years or less before their child enters college, it is deemed best to invest in a 6 year fixed income fund. Examples of fixed income securities are Treasury bonds, corporate bonds, certificate of deposits, treasury bills and treasury notes. These securities are good choice for rise averse investors seeking a stable source of income payments at regular intervals. It is low risk so expect it will have low returns as well.
However, if child still has 6-10 years to go before entering college, a balanced fund would be recommended. A balanced fund is a mutual fund that keeps 50% of stocks and 50%bond investments. Investing in balanced fund are for those people who need regular, long term cash inflows because of income return boost and diversification of bond stocks which make room for some capital growth.
If a child has more than 10 years to go before entering college, an equity mutual fund would be recommended. It is invested in pooled amounts of money in the stocks of companies publicly listed in our stock exchange. Especially if your child is interested to take a 4 – 5 year course, it is wise to start investing early and take risks as much as you can.
2. UITFs
Unit Investment Trust Funds (UITFs) are also pooled funds except that they are being sold by authorized bank employees in a commercial bank. Just like mutual funds, they are professionally managed by fund managers who invest these funds in various types of financial instruments like money market securities, bonds and equities. Unlike mutual funds, UITFs could be used for short term financial goals and could go as low as P10,000.00 for minimum investment. These fund managers just charge investors sales charge, redemption fees and trust fees.
3. Pre Need Plans
Another way we could prepare for our children’s college education fund would be an educational plan. These are pre-need plans that can help us save money in advance. The amount for educational plans will depend on the age of the child and how long will we be paying for it and what additional benefits we can opt for. Payment period is usually five to ten years or even more depending on what kind of plan we are getting for our children. The benefits of the plan is usually given when the child reaches age 16 or 17. It would be cheaper if the plan was taken right after the child is born. But remember, many pre-need companies have already folded up in the past and we have to choose wisely because not all pre-need companies are stable. Another thing we have to consider is the inflation of tuition fees which averages between 8% to 10% p.a. If the return on your educational plan is about 3% to 5% p.a., then that would not be a benefit plan for our children, that would be a deficit. We do not want to get in a situation ‘under planned’ nor a budget shortfall in the beginning of our children’s school year. Before getting in to a pre-need plan, compute its rate of return.
So given all these financial instruments listed above, one can deem that the best way to invest on a child’s educational program is right after when the child is born. This will ensure that a certain amount of money has already been placed for the child’s bright future as early as now. This is also considered as a wise move as insuring your child’s bright future at a young age would mean a cheaper premium charge compared to when a parents gets one for his child at a later age. The earlier parents will start planning for their children’s future, the sooner they will realize the benefits of long term financial planning.
Not all parents could afford to pay those educational plans immediately. Hence, it would be better if they would seek the help of a financial advisor who is trained and equipped to give you the necessary financial advice depending on your financial needs and situation. Through them, your financial dreams could be turned into a reality.
