Having a child is often the turning point in a couple’s life. After the initial delight in becoming parents and the start of a new found desire to provide the best for the baby, reality often starts to sink in and you begin to wonder if you can afford to continue to give him the same quality care and the kind of future that you envisage for him.

That future lies in his education. Every parent knows that the answer to giving a child a head start in life is through a great education so that he secures a sound foothold in the knowledge economy of tomorrow to build for himself a successful life. In fact, education represents the greatest gift that parents can give to a child.

But every parent also knows that education is not cheap. Its cost is escalating everyday, due to many factors such as inflation. For many parents, paying for a child’s tertiary education is one of the heaviest financial responsibilities that they will have to undertake if they want to give their child that head start in life that they are dreaming of. This involves an accumulation of a large sum of money. For example, based on a 5.0% inflation rate, a more than RM40,000 arts/business degree programme today is going to cost a whopping RM 83,000 in 15 years’ time.

Tuition fee and living expenses for overseas studies have increased by 3.0 to 8.0% a year. How will the average parent get around this cost? By giving themselves time and doing proper planning.

Plus, with the cost of education skyrocketing each day, it is essential to have a plan that can safeguard his future.

Financing your child’s education is not the only worry you might have when it comes to his future. Life as we know it is full of uncertainties, and that is why it is also important that you provide your offspring with proper protection to guard him against unforeseen circumstances.

A step by Step Guide to Financial Planning

Making a plan
Of course, you cannot really predict which university your child will attend but you can settle on an average. Also, give the option as to whether he or she will be going overseas or whether she will be attending local private colleges and public universities. So, you can first set your life goals by identifying the following; Which field is your child going to venture into? A full degree programme overseas? A twinning progrmme ( where part of the course is done locally)? An overseas programme done locally? Or study at a local university?
 

Starting Off the Education Fund
To start off your child’s education fund, you may wish to set aside a lump sum now. This requires years of careful planning and saving. If you are a young couple, one of the advantages on your side is time. Time allows you to put aside some amount each month. Time allows you to benefit from the power of compounding. Time gives you more options. Notwithstanding, you may have high hopes for your child.

Let’s say you would like to send your son to Australia for the entire three years of the undergraduate programme. And you plan to set aside RM50,000 from your life savings now for the fund.

Referring to Table 2 below, deduct this lump sum of savings from the present-day total cost of your child’s education from Step 1. The resulting figure is the funding shortfall you face if you were to send your child to college/university today as shown in Step 2.
 

Table 2: Setting aside your lump sum contribution For the child
Step 1	The current cost of education	In Australia
	Tuition fees	A$13,200x 3yrs = A$39,600
	Living expenses	A$11,500x 3yrs = A$34,500
	Present-day total cost of child’s education in A$ currency	A$74,100
	Present-day total cost of child’s education in RM	RM155,610
Step 2	Your lump sum contribution now	In Australia
	Lump sum contribution	RM155,610-(RM50,000)
	Funding shortfall in present-day value	RM105,610

Adjustment for inflation
Your funding shortfall for today will be different by the time your child commences college/university. On average, the cost of studying overseas has gone up by 4.0% to 5.0% every year. Therefore, it is important to factor in inflation. From table 3, choose the inflation rate factor of your choice whether it’ll be at 4% or 5% rate that corresponds with the number of years before your child starts college. Multiply it with the funding shortfall amount. The resulting figure is the amount that you need to save.

If you are expecting your child to commence college in15 years, based on a 4% inflation rate at 1.80, the inflation-adjusted funding shortfall is RM150,098. This is the amount that you will need to save.

Factor in inflation:
RM105,610 x 1.8 = RM 190,098.

A financial plan
Financial success does not just happen. You need a financial plan for your child’s education. Table 4 shows the monthly savings required from a range of a 5-year, 10-year, 12-year, 15-year to 18-year category to target your funding shortfall. But, is this the better way to target for potentially higher returns for your child’s education fund?

There are many options available with such investment tools in the market: insurance policy, unit trusts, stock market, property or the banks. If you keep your money strictly in your fixed deposits, there is a risk of inflation eating into your fund. And selling off your property to finance your child’s education (which is the traditional way) may take longer because you need time to market it especially if the economy takes a downturn. With the stock market, you have to be prepared to take more risks and face some volatility. Similarly, there is risk in investing in unit trusts, as it does not come with comprehensive insurance protection. Another option is investment-linked life insurance which can provide you with comprehensive protection and investment in an all-in-one insurance plan.

investment-linked life insurance plans are an alternative solution that can potentially provide higher returns as compared with a traditional endowment policy. This type of plan is more flexible. You can top up your investment as your income grows. Or you can switch your investment from one fund to another at any time you wish.

More importantly, by using the concept of dollar-cost averaging with regular premium payment at regular intervals instead of a lump sum, it will reduce your risks when faced with volatility in the financial market.

Investment funds are usually taken care of by experienced and professional fund managers. Therefore, you should not worry unduly about which fund to buy, as there is a range of funds that you can choose according to your risk tolerance.

Source: Great Eastern Life
Assurance (Malaysia) Berhad