3 Common Mistakes Parents Make in Saving For Their Child’s Education
How many times as parents do we have such conversations with our spouses? In truth, none of us can control eventually what our children will choose to do in their career. What we can control is being prepared financially for them when the time arises.
How do we do that? We save! But how?
I recall when I first started work as a financial planner, I took out all the plans that my mum did for me, and guess what? I had an endowment plan bought for me when I was at the age of 21 and the savings will only mature when I turn the age of 46. Being very curious, I asked my mum why she did such planning? And her answer was….
“For your education.”
Boy can you imagine my reaction! I recalled asking her,
“Oh man! You mean you want me to study all the way till 46 years old!!! But even if I were to challenge myself to a PhD course, I would have completed it way before 46!”
This may sound funny but in reality this is what happens when we don’t plan properly or even worse, plan wrongly.
Before you start punching in your calculators, 3 Questions to Ask Yourself:
1. How much is the tuition fee going to be when your child starts tertiary?
Table 1: Annual Tuition Fee for Admission 2017/2018 for singaporeans with tuition grant included
Above is the annual tuition fee for the current year admission cohort. Do remember, inflation of estimated 3% per annum has yet to be taken into consideration.
2. How many years is the course of study that you are planning to save up for your child?
Accountancy and Business
– 3 Year for a Degree; additional 1 more year for Honors
– 4 Year Course
3. How much living expenses would your child need during the course of education?
Table 2: Example of estimated annual cost including tuition fee for current new cohort; Abstracted from NTU Viability Calculator; https://wis.ntu.edu.sg/webexe/owa/vical.showvical; 1 July 2017
For my fellow enthusiastic yet concerned parents, here are 3 simple tips to remember when you start a savings plan for your child’s education:
1. Plan the maturity payout date to coincide with the start of Tertiary Education
For girls, it 19 years old and for boys, 21 years old (due to National Service). Some common mistakes people make is to buy endowment plans that come with standard maturity terms such as after 15 years or 20 years. Another common mistake is to have the plan mature when the child completes their Tertiary Education such as at age 25 (another common “standard” maturity date for endowment plans).
2. Build in flexibility – You might need the money a little earlier or a little later
Our children will develop their own paths as they grow. This means the plan you set up should be flexible enough to support them throughout their learning years. For example, there might be a need for additional funds during the secondary school years for school-organized overseas trips. Perhaps, your child might excel in sports and ends up going into university later than planned. The plan should ideally have the flexibility to allow for earlier or a delay in withdrawals.
3. Don’t mistake a life insurance plan for an endowment plan
Not all insurance policies are the same. If you intend to save for your child’s education using insurance, be aware of what type of polices you are buying. Just because a policy acquires a surrender value over time does not mean it is a “savings plan” and most certainly, not a savings plan for the purpose of your child’s education needs. A simple test is to see if the policy you are considering is able to fulfil items 1 and 2 that I mentioned earlier.
Why not consider a “Structured Education Plan”?
If you are not into investing or are time-challenged to manage the finances and savings for your child’s education, you can consider buying a “Structured Education Plan” offered by different insurers. Currently, there are at least 3 such plans offered with variations in features to suit different needs.
Generally, these plans are designed to provide guaranteed cash payouts at yearly intervals when the child begins tertiary education (e.g. age 19, 20 and 21 for a girl). Some plans can even payout earlier when the child starts primary school with additional insurance features packaged in such as waiving of premiums should the parent be disabled while saving for the child’s education.
Having the plan structured in advance will help to ensure that in planning for your child’s education, the potential problems I mentioned in the 3 mistakes above will be avoided.
(NOTE: Get our Structured Education Plans Reference List to help you select a plan that is most appropriate for your child. Get your reference list here)
Remember: It’s about you as much as it’s about them
A child will bring along many blessings and as parents, we will by instinct want to give and provide. Very often, we don’t know when to stop or perhaps, even feel guilty if we think about holding back our gifts. Yet, raising a child will inevitably place a strain on our finances. The most apparent financial hit we will take is to our retirement plans.
Getting the finances of your child’s education planned properly is not only for their benefit, it is also for our own. It allows us to plan and think about our own retirement needs earlier and with more clarity.
I hope this article has served its purpose to remind you to plan early. Our children grow fast, sometimes too fast and before we know it, they will have that conversation about which course to study and which school to choose. It is our duty to make sure that the discussion should not be limited by how much it cost.
Article by Pamela Chong
The writer is a Associate Manager representing GEN Financial Advisory