Six fundamentals when saving for your child’s higher education
Written by Jamie Bubb-Sacklyn on October 03, 2018.
In September I made my second radio appearance chatting to Tan Chung Han on his money show, Ringgit and Sense, about the high and rising cost of a university education and how parents can ease the pain. Six key considerations emerged from our discussion which will be useful for anyone wondering where to start with their education planning:
1. Plan ahead
First off, work out kind of costs you are looking at. I gave some figures on the show. Let’s say you picture your little brainbox chooses to study at Oxford University. Right now, a four year course is estimated to cost an eye-watering £ 145k or 775k ringgit with tuition fees of £19,000 per year (for international students) plus around £14,500 in living costs (rent and accommodation). If they opt for Yale the figure is even higher at 1.25 million ringgit. Perhaps even more frightening than that gigantic figure is the fact that costs have risen by around 34% over the last five years. Unfortunately for parents, education costs are rising way ahead of inflation. Starting regular saving early will make what can seem like a monumental task a whole lot easier.
2. The forex factor
If your child chooses to study abroad inflationary pressures can often be further exacerbated by the forex factor. While in 2011 three ringitt would buy you a dollar, now a dollar will cost you over four. That’s why it makes sense to invest in the currency of the country where you think your children will end up studying. Of course, this may not be evident if your child is a wee babe in arms, in which case choosing a strong currency such as US dollars, sterling or euros will even out currency fluctuations and reduce your risk.
That doesn’t mean that you can’t invest wherever you like. Even if your fund is based in dollars or sterling you can still invest in other geographical areas which you think might give you a strong return, again mitigating currency risk.
3. Time horizon
The amount of risk that you can afford to take will depend very much on your time horizon. If you start when your child is still an infant you can afford to take more risk than if you have a teenager who is already in secondary education and will start university in five years or less. The general rule of thumb would be to reduce your level of risk as you approach the time to start paying education costs.
4. Don’t sacrifice your pension for your child’s education
Tan asked me whether parents should prioritise their child’s education over their retirement, dipping into an EPF to pay for university, something which is stereotypically common for aspirational Asians who are willing to make huge sacrifices to give their child a first class education. This is not something that I would recommend – it really is better to keep two separate pots and save for both in tandem although I appreciate that it isn’t possible for all parents to do that.
5. Harness the power of compounding
Einstein described compounding as ‘the eighth wonder of the world’ going on to say ‘He who understands it earns it, he who doesn’t pays it.’ Understanding compounding – interest on interest or, more often in investing terms, returns on returns – is difficult for our human brains to comprehend, as I illustrated to Han with this teaser:
If you were offered 1million ringgit today or 1 cent which doubles every day for 30 days, which would you choose?
Most of us would choose the million today, after all a bird in the hand is worth two in the bush, right? Well, actually no. If you chose the doubling cent option, you would probably feel you had made the wrong decision for most of the month. After 10 days, you would only have 5.12 ringgit and after twenty you would have 5242 ringgit. It is only after 28 days that it would become clear that you made the right choice after all, finally surpassing the million mark, and ending up with over 5 million ringitt by day 30. While double returns are obviously not realistic, this principle applies for smaller returns too.
6. The benefits of property investment
Whatever your goals, diversification is a key principle of investing and a balanced investment portfolio comprising stocks, bonds and property is what you should be aiming for. However, when it comes to education, property, an asset class much loved by Malaysians, is particularly interesting. Property investors usually benefit from both capital appreciation and yield in the form of rental income and if you invest in the city where your child chooses to study you can make huge savings on living costs by eliminating the need to pay rent. It’s also easy to earn extra income by renting out any spare rooms to your child’s friends. When you consider that in a city like London living costs are £1000-£1500 per month whereas a Yale student could be spending $22-23,000 per year, that’s a huge plus.
Again, I appreciate that often you won’t know where your child will end up studying but investing in strong currencies and locations where property prices are expected to rise will give you the option of selling and realising gains to purchase elsewhere. It’s all about trying to keep your plans as nimble as you can and a good adviser can be instrumental in helping you devise a financial strategy tailored to your situation.
I’ve highlighted the main points of my discussion with Han in this article but you can listen to the interview in full at this link. If you’d like some help with finding the right investments to give your child the ultimate leg up in life by enabling them to graduate from university debt-free, why not get in touch with me at firstname.lastname@example.org?