Benjamin Franklin said it best, "An investment in knowledge pays the best interest!" That is why we-parents, should not be cutting corners when it comes to our children's education. Today, I am going to share with you 5 steps on how to plan for your child’s education fund. If you are a parent and have yet to start planning for the education fund for your kids, it is time to start.
There is a proverb among the Chinese that reads: “再穷也不能穷教育” can be loosely translated as "Knowledge should not be sacrificed even if we are impoverished." Parents feel that if their children are educated, they would be able to earn a greater income and have better prospects in life, allowing them to contribute in a variety of ways to the family and society.
Nonetheless, the majority of parents including me believe that we have plenty of time to prepare for our children's education. Hence, we tend to prioritize supplying them with other "needs" such as a nice vacation or other forms of entertainment. Similar to any investment, time can either be your ally or your worst enemy. Why not start planning the best ang paw (red packets) you can provide your young children now if you are a parent?
5 Steps to Plan for Your Child’s Education Fund
1. Cost Estimation of Education
While making an estimate of the cost of education, it is important to take into consideration the following factors:
- The possible fields of study for your kids to pursue.
- Which type of higher education institution, domestic or international, do you plan to enrol your child in?
- If you want your child to attend a university outside of the country, how much would the basic cost of living be?
Thanks to the advent of the Internet, it is easy to find information on a variety of topics, including the fee schedule and the total cost of living. You can discover more about the tuition and other costs associated with receiving an education in Malaysia by consulting this page and this page.
However, keep in mind that some or all of these elements could shift throughout the course of time. You should give the plan a once-over at least once a year in order to stay current on the most recent happenings, and you should make it a point to obtain information from a variety of sources in order to guarantee that the cost of education and the overall cost of living fall within a comparable range.
2. Clarify Your Present Financial Situation
Now that you know how much is required to reach the cost of education), you will need to know how much you now have in order to calculate how much you need to put aside each month in order to offset the difference. The starting point is the amount that you currently have.
The majority of people keep their wealth in liquid assets, real estate, and several other sorts of investments. You need to ask yourself what percentage of the assets listed above can be set aside to pay for the education of your children.
For the express goal of paying for the education of your children, for instance, you may wish to set aside anywhere from ten to twenty per cent of your available funds. If you have real estate investments, you may also choose to sell one of your homes after your child reaches the age of majority (18 years old). There is also a possibility that some individuals have endowment policies with insurance companies that will mature in 20 years.
The most important step is to compile a list of all of the assets in your possession that will serve as the foundation of the education fund for your children.
3. Calculate How Much Is Needed For Your Child's Education Fund
In this section, we will utilize a free online financial calculator to quickly determine how much money you will need to set aside or invest in order to provide a good education for your children. Click here to access the college savings calculator.
Enter the respective fields based on your current financial situation. The sum that you enter into the box labelled "Future Tuition Cost" represents the amount that your education will be worth in the future.
The cost of education in this instance is RM120,000 now. Nevertheless, if inflation stays at its current rate of 4% for the following 17 years, the price of university education for your child will balloon to RM233,748 by the time they are old enough to enrol. You can also use one of the many available online calculators to estimate the shortfall needed for your child's education fund.
4. Selecting the Appropriate Financial Vehicle
When it comes to selecting a vehicle for one's investments, there is a plethora of options available. But, because we all know that the majority of investment journeys won't be easy sailing all the time, it is extremely vital to follow these three laws of investing:
A. Keep Your Investment Funds Safe
When it comes to saving for your children's education, one of the most important rules to follow is to make sure that your investment capital is protected. There are times when we are able to put a little amount of our portfolio into investments that carry a higher level of risk. Having said that, you definitely don't want to do that with the educational portfolio of your children.
For instance, if you had a loss of 15% on an investment, you would need to make a gain of at least 16% in order to get back to where you started in terms of capital. If you suffered a loss of 30%, you would need to make a gain of 35% in order to break even, and so on and so forth.
B. There Is No Perfect Investment
In a nutshell, what is beneficial to me might not necessarily be beneficial to you. One man's meat is another man's poison. Having said that, if you are interested in saving money for your children's education, the National Education Saving Program offered by PTPTN is an option that deserves some of your consideration (SSPN). Parents who invest their savings in an SSPN-I account are eligible for a tax break of up to RM8,000 per year.
C. Begin With The End In Mind
Lastly, remember to retain your focus on the end goal. Never forget the reason behind your actions. Make it a habit to examine your investment strategy on a regular basis so that you won't be caught off guard by any unfavorable developments when your children are getting close to the age at which they can enroll in postsecondary education.
5. Pitfalls To Avoid
While we as parents are zealously trying to plan for our children's future, we need to ensure that we avoid pitfalls that might derail our whole financial planning altogether. Do not take anything for granted and always be vigilant with your money to make sure that it is appreciating all the time.
A. Being Misled By Selfish Financial Advisor
A large number of dishonest "advisors" prey on the anxiety and greed of parents as a means of persuading them to participate in unregulated investment products offered by their companies. In the event that you require assistance from a third party throughout the process of school planning, it is imperative that you work with a representative who holds the appropriate licensing.
B. Neglecting Retirement Planning
There are alternative ways to ensure that your children will receive an education that is up to par, even if you are unable to cover the shortfall that was estimated before. If you are a Malaysian, some of these ways include asking for an education loan from PTPTN or going to a public institution in your area.
If, despite your best efforts, you are unable to overcome the gap in your retirement planning, you will have even fewer options accessible to you later on.
C. No Constant Review of Your Investments
It's possible that I'm starting to sound like a broken record, but it's really vital to assess your portfolio and assets at least once per year. Also, if necessary, you should rebalance your portfolio in order to guarantee that it will achieve the goal of providing X amount of money Y years from now. If you do not make constant review, your financial plannings will be derailed and you will not even notice it until it is way too late.
Conclusion
Putting money away for your children's education is a long-term objective that may at first appear to be a significant time commitment. The process can be substantially simplified by developing a well-thought-out strategy and learning to treat time as an ally rather than an adversary. Start as soon as possible, regardless of how large or small the amount is. Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it”. Remember: The earlier you get started, the better the compounding effect will be for you.
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