Give your children the best start in life
It’s September and the kids are back at school. One of the most important financial planning issues parents contend with is their children’s education. Apart from buying property, education fees are one of the largest investments parents will ever make.
For the privileged Expat, an employer may cover education costs but in an increasingly austere world, some of our clients have seen their subsidies reduced or even eliminated. Indeed, a more common approach we have seen recently is the employer only paying for the additional cost of education abroad, over and above a typical fee-paying school at home. Of course, once Expat life is over, education fees subsidies usually disappear. At the very least, University or College fees are an expense all parents are likely to have and rarely is it the case that an employer will cover higher education.
All parents want to ensure that their children have the opportunity of the best education money can buy, both during school and at College or University. But it comes at a cost. For example in the UK, the princely sum of approximately £280,000 will be needed for just one child to go through a typical British private school and University:-
£ 230,000 school costs with fee-inflation at 6% and extras at 8%
£ 278,800 including an extra 3 years at University
In America, 4-year College fees, depending on its status as State or Private, could typically cost between $40,000 and $120,000 excluding the extras like accommodation and books etc.
College/University fees typically rise by about 5% per year so when calculating funding needs, it is futile to invest in a low yielding asset like a bank account which cannot currently keep pace with the rate of rising fees.
Unless a child achieves a full scholarship, parents must make provisions. Below are some education fees funding options :-
- Pay as you go from salary at the time it is needed;
- Donations from a third party, e.g. Grandparents;
- Raising a mortgage or obtaining a personal loan;
- Pay from accumulated savings, or withdrawals from investments
Not saving at all and relying on having enough money from salary at the time the child enters education is a dangerous strategy if one is made redundant or becomes long-term sick
Most people cannot rely on family and wish to avoid potentially expensive credit so they usually have to save from salary in advance and/or investing accumulated cash.
Commonly, parents will solve these problems in one of two ways, or a combination of both:-
1. Investing Accumulated Cash
For those who have already built cash reserves, a range of options are available including secure and actively managed investments, which aim to provide returns which are greater than cash but without undue risk. One does not have to take unreasonably high investment risk to target a return of about 5% per year.
2. Regular Savings Programs
One of the most popular forms of education funding is regular savings programs. If parents have the foresight to start saving when their child is born, they have 18 years to accumulate sufficient money for higher education. For example, should the parents aim for a college fund of US$200,000 and the regular savings program achieves an average return of 7% per year, the commitment would be approximately US$550 per month – not an unreasonable amount. However, if they avoided planning until their child was 10 years old, the monthly contribution needed to achieve US$200,000 is about US$1,250 per month!
Much like retirement planning, it is never too early to start an education fees program. The most astute of parents will instigate a plan even before children are but twinkles in their eyes! If however they are not fortunate enough to have children, the savings plan can act as a means of accumulating wealth for other long-term purposes like retirement or paying down a mortgage.
The dangers are inaction and under-estimating the true costs of children’s education. There are few more crushing blows than parents coming to realize that they cannot afford to send their children to a top school or University. Don’t let that happen to you.