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Or even NUS? A child
trust account isn't enough to anymore, say
money experts. Start planning now for your
child's education.
Business development manager, Vincent Goh,
is a proud parent of a precocious five year-old
girl. "I swear she's a genius,"
says the beaming father. "She learnt
to read simple words when she was three. Now,
she surfs the Internet like a pro."
Goh is confident his daughter is smart enough
to make it to a university. He says, "I
have no doubt about her abilities. The only
question is, whether we can afford it."
For now, he and his wife are content to take
it easy and keep their fingers crossed that
"everything will fall into place by the
time she finishes her A-levels". He says,
"Anyway, it's too early to be thinking
that far ahead."
Never too early
Not so, according to bankers and financial
planners. Rather, the key to achieving your
financial goals is to start early. Christopher
Teo, first vice president and head of the
investment services at United Overseas Bank
says, "One of the most basic concepts
in financial planning states that the longer
you procrastinate, the higher the interest
yield needed to achieve your goal.
"For example, it will take you eight
years with a compound interest of nine per
cent to double your initial capital, and 7.2
years at 10 per cent to do the same. Today,
it's hard to find products that will generate
such returns. It is not impossible, but the
risks will be higher."
Dennis Khoo, general manager of Standard Chartered
Bank's wealth management consumer banking
in Singapore adds, "Starting earlier
gives you more time to take advantage of dollar
cost averaging." For example, say you
invest a fixed amount every month. Spreading
out these contributions over a longer period
of time means that you can effectively decrease
the average cost of your total investments."
Theoretically, the practice of starting early
and saving regularly sounds easy. But both
bankers acknowledge that keeping to a strict
regimen of setting your money aside requires
a lot of willpower and discipline.
Teo says, "Saving for children's higher
education is a difficult task for most families.
Most of the time, you would be saving simultaneously
for other things, such as your retirement,
and there will also be other personal aspirations
one might have, such as new home, or a new
car."
Planning ahead
Sending the kids to university these days
can cost quite a hefty sum. In another 15
years, it is expected that education at a
local university can cost up to $100,000,
while a premium course at an Ivy League college
in the United States can set you back by up
to $400,000.
Teo says, "It's not just a simple case
of making sure you can afford the tuition
fees alone. You will also need to plan for
room and board, annual plane trips back home,
textbooks, and other expenses along the way."
To calculate the amount needed for your kid's
education, visit the university's website
for an estimate of how much it would cost
today. Add in the current inflation rate,
plus another two per cent to arrive at the
total sum you need to save up.
Khoo says, "The basic methodology is
to first decide how much you need. After that,
ascertain how much more you can save, given
the time frame left. The gap between what
you have and what you need is what you will
need to cover by making use of investment
tools."
Banking experts recommend lower risk investments
such as money market instruments, endowment
plans, and professionally managed unit trusts.
Teo says, "A child's education is not
to be gambled away, so you still want to remain
prudent in your investments."
The earlier you start, the easier it is achieve
your financial goals, without having to resort
to too many high-risk investments such as
stocks and derivatives. To be sure, while
these instruments yield higher returns, they
also come with correspondingly higher risks.
However, if you start late, all is not lost.
Khoo says, "You have to be realistic.
If you can't afford to send your children
to a foreign university, there are alternatives,
such as local universities. Or else, many
banks also provide personal loans that can
be used for education financing."
LOWER RISK INVESTMENTS
Money Market Instruments
Treasury bills and banker's acceptance are
examples of money market instruments, and
work along the same principle of IOUs. You
lend a sum of money which you will get back,
together with interest, at the end of the
maturity period.
This investment option is fairly safe since
the principal is fully guaranteed by the issuer
if it is held to maturity. Money market instruments
also yield higher rates of return than term
deposits, and allow for higher liquidity of
assets.
Insurance
There are many insurance policies that allow
you to set aside a certain sum of money that
can be paid upon maturity. Some of these policies
are also pegged toward other investments.
This means that you receive higher returns
if they perform well.
And notwithstanding how well the pegged investments
do, you will still receive your initial principal,
together with an agreed interest sum upon
maturity. In many such policies, you can opt
to pay your premium monthly, or annually.
You can also choose to pay a lump sum premium,
but this will mean you do not enjoy the advantages
of dollar cost averaging, especially if your
policy is pegged against another investment
vehicle.
The added advantage of insurance is that it
can also protect your family and assure them
of financial security in case of unforeseen
circumstances. This way, no matter what, your
child's education funding remains safe.
Unit Trusts
These are managed funds where a specific basket
of stocks and shares are bought, using a pooled
sum of monies by a fund manager. This enables
investors to hold on to more expensive stocks
and shares of high performing companies that
may otherwise be out if their reach.
Unit trusts are generally regarded as safer
investments than stocks because they are professionally
managed, and your money is spread out over
a wide range of companies. Depending on your
risk appetite, you can opt for unit trusts
with a higher ratio of stocks to bonds, or
vice versa.
PICK & CHOOSE
INVESTMENT & SAVIINGS PRODUCTS
Savings Accounts
| • |
Standard Chartered Bank's (StanChart)
e$aver Kids!
This savings account for kids boasts
the highest interest rate of 1.88 per
cent per annum. When you open an account,
you also have the option of signing
up for Kid! Protector, which gives a
protection benefit of five times the
deposit amount in the e$aver Kids! account.
|
Insurance
| • |
StanChart's Steady Saver
This insurance plan combines protection
and savings with a yearly cash payout
of 5 per cent of the sum assured from
the end of the second year. It also
promises a future cash lump sum payment
upon maturity. This plan is available
for a minimum sum of just $7 a day. |
LOCAL OR FOREIGN UNIVERSITY? STANCHART'S DENNIS
KHOO ILLUSTRATES HOW TO ACHIEVE VINCENT GOH'S
DREAM OF SEEING HIS DAUGHTER TO COLLEGE IN
14 YEARS.
ASSUMPTIONS:
| 1 |
A monthly household income of $4,000. |
| 2 |
The family
sets aside an initial amount of $400
per month for investment, or 10 per
cent of the monthly household income.
An annual increment of 5 per cent
was also factored in for annual salary
increment.
|
| 3 |
Historical
inflation rates of 5 per cent and
2 per cent are used for computation
of fee inflation in the US and in
Singapore, respectively.
|
SCENARIO 1: FINANCING A LOCAL TERTIARY
EDUCATION
To achieve the goal of sending their daughter
to a six-year university course in a local
institution, the family will require $102,000
over six years. Adjusting for inflation over
a 14 years, an amount of $134,000 needs to
be accumulated. With an initial monthly contribution
of $400, the couple will need to invest in
assets that yield an annual return of 9 per
cent. Khoo recommends the following allocation
mix:
| HISTORICAL RATES OF ANNUAL
INVESTMENT INSTRUMENTS |
RETURN |
ALLOCATION
% |
| Money Market Instruments |
2%
|
15% |
| Endowment |
3%
|
20% |
| Unit Trusts (Bonds) |
5%
|
25% |
| Unit Trusts (Stocks) |
8% |
40% |
The following allocation mix combines a disciplined approach of reaching the goal, which is through endowment and the need for diversification.
SCENARIO 2: FINANCING AN IVY LEAGUE TERTIARY EDUCATION
This will require US$148,000 or S$247,160. Adjusting for inflation over a 14 years, an amount of $489,000 needs to be accumulated.
With an initial monthly contribution of $400, the family will need to invest in investment instruments that yield an annual return of 20.6 per cent.
The following options can be adopted by the family: A. Triple the amount required to be invested to $1,200 per month. B. Consider local tertiary studies as an alternative. |
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Personal Finance Matters 
