Set target, look at affordability


GOOD education is expensive. Parents who want to see their offspring make it to graduation day must plan ahead as degree courses these days come with a hefty price tag. Tertiary education can cost anywhere from RM30,000 to more than half-a-million, depending on the programme, institution and country. 

The enormous bill skyrockets for the family when there is more than one child entering university within the same time frame. 

Over the past few years, however, there is an increasing awareness among young couples of the need to prepare well ahead and start saving up for their child's education. And for these parents, they have the advantage of having more investment options compared to their parents.  

Hong Leong Assurance Bhd life division chief operating officer Laurence Lim lists the modern parents' choices under the following categories: fixed deposit, unit trusts, shares, asset accumulation (property), and education insurance.  

Laurence Lim

Consumers, Lim says, can become confused by the myriad choices and the promises of high returns; so before making a decision, the individual needs to be clear of the “risk trade-off.” 

He advises parents planning to invest early to finance their child's education to remember an important rule, “There is no one instrument that can serve every purpose. So you have to first define your purpose or target to help you decide on the instrument of investment. The way to manage risk is to diversify; don't put all your eggs into one basket!” 

Another financial expert, a director of a US investment bank, says that one should plan financially where applicable and as early as possible. 

“Planning for a child's education is only one aspect of a family's overall financial planning,” says the director who wants to be known as Tang. 

“For example, start with a house. Ask yourself if you can afford a house, should you buy one or rent. Usually it is better to buy, but of course this has to be within the financial resources of the family.” 

Tang advises that the second step would be to build up savings for retirement and the children's education and there are two ways to address this: first – insurance must be an integral part of the process because insurance protects your earning capacity and health. 

“You will have to work out the coverage first and after factoring the cost, look at how much cash flow per month you can put aside for the long-term. 

“Say you have a surplus of RM800 per month, you can either invest in a long-term insurance plan or a well structured portfolio comprising unit trusts or bonds,” he says. 


Fixed Deposit 

“Fixed deposit is considered the most conservative form of investment where risks are low and returns stable,” says Lim. 

He provides an example to illustrate how the method works, “Let's say the parents think their child will need RM100,000 when he is 18 years old and work from there.” 

Here, the couple decide on the amount of money they want their child to have and the time the money is needed, work out the amount over the period they have, put the required sum into the bank and collect the interest. 

“However, this kind of investment requires a lot of savings. You cannot dip into this piggy bank in times of emergency, otherwise you will never meet your target,” explains Lim. 

Tang concurs with this opinion, adding that depending on the cash flow needs of the family or person, fixed deposits should never form the core of an investment portfolio if one wants to build up savings for education. 


Unit trusts or shares 

Unit trusts are an ideal investment given the demanding schedule of working adults. Through the help of a financial planner, parents can carefully select some unit trust investments that will help them stay invested over the long term. 

Unit trusts will provide parents peace of mind to concentrate on their careers without having to spend too much time monitoring their investments.  

One of the benefits unit trusts offer is diversification. Each unit trust usually invests in a wide range of securities, more commonly known as asset allocation. 

Parents can actually start a regular savings plan for unit trust investment. This approach requires investing a portion of their monthly income regularly into one or more unit trusts. By doing so regularly, over time, they will be able to ride out the volatility of the market and to accumulate wealth. 

Tang describes unit trusts as a generic term covering many types of funds, from country funds to sector funds. “Not all are however, appropriate for the investor, and it also depends on the investor's risk profile,” he cautions. 

“There are funds which have performed so badly that investors have lost a lot of money. So there is a lot of risk involved. Unit trusts can also be expensive as the distributors of the funds charge fees ranging from 3% to 5% even before imposing management fees of the funds,” he adds. 

“A lot of the benefits of investing depends on how well the financial planner or adviser can structure a plan which is suitable for the investor,” says Tang. 

Lim says that parents who go for this option need to grapple with the problem of unpredictability. “We do not know if the company (which the parents have invested in the shares) will still be in existence 20 years later.” 

“Who could have predicted Enron, September 11 or even SARS where the tourism industry is still reeling from the impact?” he counters, adding that the market rate could be low when the time comes to cash in on the shares. 


Asset Accumulation 

Due to the volatile market conditions, some investors are wary of unit trusts and shares. Put off by the losses incurred, some have turned to property, believing that its value (especially houses or apartments) will always appreciate. 

For this reason, Edwin Doray (not his real name) decided to place a down payment for two apartments (one each for his daughter and son) so that by the time they reached college age, the value of the property would be enough to pay for their studies. 

Lim however cautions that a lot of people have the wrong idea (about property investment). “Property is only an asset when you sell it,” he reminds parents. 

“Remember, when you buy a property, you usually have to take a loan. This means, you have to pay interest (for the loan).” 

And even then, he says, the investment may not pay off. “You can only hope for appreciation (of the property). Then there is the problem of liquidity. You need to sell (to get the money for the child's education) but you can't predict that the value will be high when the time comes. So, because of the timing factor, property is not a suitable investment for education planning.” 

Tang concurs saying that if a family owns a property for owner occupation, it can be the basis for long-term retirement and not for education, as property is really very long term. 

“Buying another one would depend on the total balance sheet of the family. It is usually very expensive and you should only go into it if you have the borrowing capacity or if you can really afford it,” he says. 


Education insurance 

For those who may be confused about the differences between an education insurance policy and an endowment policy, Tang defines endowment as a generic term used for insurance policies designed to build up savings. 

“Education insurance is specifically for the purpose of building up savings so that on maturity of the policy, the family can use the savings to pay for the education of the child,” says Tang. 

Lim recommends education insurance for parents who do not want to take high risks when it comes to investing for their children's education. He believes that education insurance outweighs other types of education funding because it virtually guarantees the parents will reach their targeted sum of savings. 

“It is similar to all other types of investment. You define your goal, that is, the sum you want to reach at a specific time. The (insurance) agent will then work with you on the amount you need to put in every month. 

“However, the beauty of the plan is, if anything happens to you, it will still allow the target to be achieved, because the insurance company will then step in and pay the premium on behalf of the buyer. All you need is just the discipline to put in the money as scheduled.'' 

The benefits are many. It helps the parents to save gradually, allow them to plan early and protect the pathway to the realisation of the target. Adds Lim: “The one question we always ask our customers (to make them realise it) is this, 'When your child is ready for tertiary education, will you be ready?’” 

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