How much is enough for my children’s education?

This is a continuation from our previoust article, addressing the topic of how much do I need to save and what do I need to do to prepare for my children’s education.

Without a plan, do we mindlessly save every ringgit possible to achieve this goal?

Or on the flipside, do we say we can’t afford to send our kids to colleges abroad because from the offset, the fees sound expensive?

At times, we just do not know where to start. We admit, things can get very overwhelming at first.

Figuring out how much you need

Again, we re-iterate the concept of starting with the end goal in mind.

Figure out how much you want at the end of the day and work towards that.

Planning and funding your children’s education is no easy task and without a question, potentially takes a big chunk out of your savings.

That is all the more reason why we need to do careful research and planning.

For their education, start exploring your options now.

It is never too early to start your research and the additional amount of time helps you to plan better.

Where do you plan on sending your children? How much do the tuition fees cost in total now? If you are planning to send your children to overseas, make two separate sheets.

One in the currency where the university is located and the other in RM. If they are studying abroad, are you taking into account your children’s living costs on top of the education fees?

If both parents and children are still undecided on where and what to study, if possible try narrowing down some options to get an average cost of the likelier courses that you think your children will take.

This will not be entirely accurate, but it may give you a gauge, however vague, the amount that you will have to work towards.

Compound the required amount with the number of years between now and the eventual date with a reasonable rate of inflation with regards to the inflation and living costs.

Remember to use reasonable assumption rates for living and education inflation. Moreover, it is always better to be over-prepared rather than under-prepared.

Funding the need

Now comes the next phase of bridging the gap between now and then – how can we fund the required amount? This works easier with a financial calculator or the many excel spreadsheet templates available in the internet. Some of the usual inputs are, for example:

How much money do you have now?

What is an estimated inflation rate? To get to the real rate of return, which is the adjusted changes in price based on inflation.

What is the amount I need eventually?

Finally, the calculator tells you how much you need to save a month in order to come up with the required amount.

With children’s education, fluctuations in foreign exchange is another important factor to consider.

For example, a father starting his education plans in 2014 to send his daughter to study in the US would have seen the US dollar-ringgit exchange rate rise against his favour – from circa 3.16 in August 2014 to 4.14 currently in January 2018.

This represents close to an additional 31 per cent increase on top of the amount he has budgeted for.

Unfortunately, movements in the foreign exchange market are unpredictable.

What the father could do in this case to protect against the price volatility may be to constantly change into US dollars on a monthly or quarterly basis – in effect, to match the liability needed at the end.

The father inevitably incurs a higher risk if he continues saving up in RM and only convert them at the end when his daughter starts schooling.

What if I find out I do not have enough?

Some general tweaks can first be made, for instance:

Can the investment rate be increased?

For this to first happen, you must be comfortable in taking a more aggressive stance in your investment.

Can you try to save more by making some cuts to your current lifestyle?

In other words, delayed gratification in order to channel more savings for your children’s sake.

If you find that you may not be able to garner the lump sum before your children starts, not all is lost.

In reality, university or the school fee payments are usually made before the beginning of every semester.

So, you do not have to prepare for the kids’ education in one lump sum. But to adequately prepare for this; the semester payments, you best get your calculations right.

Things get more complicated if you have several children and payments for a particular year may be heavier when the semester payments are needed simultaneously for all of them.

For example, the eldest may start first in 2022, but come 2024, all three children are already in university and three simultaneous semester payments are required on that year.

On the other hand, are there other alternative and cheaper countries or colleges/universities that he can go to? Are there any scholarship programs that you can aim for?

Explore the likelihood of your children work part-time to partially support himself when he is there.

However, if the sum required is still too large, maybe you should consider a twinning program for your children.

Many private universities and colleges now cooperate with reputable universities from abroad like Australia or the United Kingdom to provide twinning programs in selected courses.

Conclusion

Now, as much as we would like to give you all the information that is required to help you with this, in truth, it will take many more pages to tailor a specific plan to yourself.

Even a difference of two per cent in terms of the investment rates or inflation rate can harbor significant consequences.

The assumptions stage in identifying living cost, education inflation rates, investment rates and foreign exchange risks requires a lot of thought and careful deliberation.

Investment portfolio planning is also different. Some parents may have started much earlier, 10 years before.

Their portfolio will look very much different to those that are just two to three years away when the children starts University. Portfolio rebalancing is also not to be taken lightly

If you need more help, don’t be shy to drop us an e-mail and our advisors will be more than happy to assist you.

Areca Capital is a niche Malaysian fund management company. We are a firm believer in the advisory-based approach towards investing. For any enquiries, you may contact us at 03-79563111 or by email: invest@ arecacapital.com.