When my children were growing up, my wife and I did not have any thought of saving separately for their education. We just tried to earn as much as we could and minimize our expenses. We saved and invested as much as we could while living a modest life. Looking back, we were blessed that our savings and continuous income were enough to give our children the best education they chose and that we could afford. Today, life is not as easy. The cost of education has increased so much that parents need to put special thought to it.
An educational plan is simply a long-term savings and investment program dedicated to paying for the cost of education of your child at a specific future date. Here are some basic steps you can take to help decide what kind of plan you need:
A. Determine how much educational fund you will need to have at a specific date in the future?
- For what level of education are you planning? Grade School? High School? College?
- What is the ideal school you can afford to send your child to? Be sure you are realistic on what you can really afford. Good education is not dependent on the more expensive schools. The most important consideration is what you can sustain and not just what you can afford this year!
- How much does your planned course cost today in your realistic school? For example, if the course you want to save for is college, how much will the four years of college cost?
- What portion of the course do you want to save for? Tuition only? Include allowances? Include books?
- How many years do you have from today till the first year of your ideal planned course? Because of inflation, consider how much the course will cost by the time your child actually uses it.
- With these five steps, you will be able to set in absolute amounts specific financial goals in specific dates in the future. You will then have established your own target rate of return and your own investment time horizon. These two variables will effectively define what kind of investment risks you should be prepared to take.
B. Study available investment programs:
- Educational plans with pre-determined fixed amounts in the future are offered by Banks, Insurance companies and Preneed companies. These plans guarantee to give out fixed amounts in the future so generally give out low yields, require higher premium payments and can lapse.
- However, Pooled Funds like Mutual Funds, UITFs and Insurance-linked Mutual Funds are also alternative educational investment programs. While they do not guarantee any fixed amount in the future, they generally offer higher investment yields, and do not lapse. You can also cash in anytime without penalty.
C. Ask the representatives of these financial institutions to show you their average annual returns for the last five years to give you an idea what reasonable investment rate of return to expect.
D. Make sure you strictly budget for the periodic payments required.
The plan that you undertake for the educational plan for your child need not be limited to fixed amounts guaranteed by financial institutions. You could set up your own and invest directly in pooled funds mentioned above. Here, what is important is to invest regularly a fixed amount. This will average your cost of investing and assure you of above average returns if you are able to maintain it over a long period of time (at least five years). This means that you have set your guidelines and you are saving/investing in the plan regularly and not touching the fund for any other use.
In all cases, make sure that the investment funds or companies you deal with are those that have proper registration and are in good standing with the Securities and Exchange Commission, the Insurance Commission and the Bangko Sentral ng Pilipinas. For information, go to the SEC’s website at www.sec.gov.ph(Investor’s Info tab) or call 584-0923.
And, as a final reminder, please choose only the winners, choose the companies that have established track records and consistently recognized as respected and responsible organizations.