Funding Options For Your Kid
Recently a lot of my clients have been asking me about how they can go about planning for their child’s future education costs as they are quite worried about not having enough to save. Well in my opinion, first and foremost is to start planning early with a small amount. Being early has alot of advantages due to compounding interest effects. Most importantly you don’t need to have one big lump sum to start off. It can be as cheap as $100 per month to set aside for them.
However there are so many options available right now so the question is ‘which one’. Today i will actually be talking about the various options that can be taken to fund your child education.
There are numerous assistance schemes available to help fund for tertiary education and one of the most widely subscribed is the CPF Education Scheme. Under the scheme, CPF members can pay for their own or their children’s full-time local tertiary education at approved institutions by utilizing up to 40% of the Ordinary Account balance, including amounts withdrawn for education and investments or the remaining balance in the OA after setting aside amounts reserved for housing or any other CPF schemes. The CPF Education Scheme is a loan scheme, and if CPF members’ monies are used for their children’s education, the children would have to repay the CPF monies in cash after their graduation. There are also other schemes such as study loans from commercial banks, bursaries and scholarships from both public and private sectors.
However, your CPF or other assistance schemes may not be sufficient to provide for all of your children’s education needs, especially when your CPF is also used to fund your home and retirement.
The other options that are available are as follow:
Regular Saving Thru Unit Trusts
A fixed amount of money can be invested into unit trust on a monthly basis to leverage on the Dollar Cost Averaging effect. By investing fixed amounts at regular intervals, you are buying more units when the price is low & fewer units when the price is high, hence allowing you to reduce your average cost in a volatile market. There are many types of unit trusts for you to choose from, depending on your investment horizon, goal and risk appetite.
When selecting which unit trusts to invest in, do take your time to understand key areas such as the investment objectives, the minimum recommended investment time horizon, the risk levels, the fees and charges, etc. Do not select funds simply based on past returns or promises of attractive potential returns, offers of promotional gifts or rumors in the market.
This option is better in a way that it can help to generate much more returns in the future but it is not meant for those people who are very investment savvy. The returns are non-guaranteed.
Investment-linked Policy
You can also subscribe to a regular-premium investment-linked plan which offers life protection with investment opportunities. Typically, such a plan will offer you some flexibility to vary the allocation of your premium towards protection or investment at different points in your life to match your life needs – be it for your children’s education or for your own retirement. Do note however that most plans may not grant you an increase in life insurance protection if you are not in good health.
Alternatively, you may want to consider taking up a single premium investment linked plan and periodically top up your investments. In comparison with taking up a regular premium investment plan, this option would usually come with much lower life insurance protection and hardly any flexibility to vary the allocation of your premium towards protection and investment.
Remember that there is no free lunch. So, while an investment-linked policy comes with both insurance and investment elements, note that these come with charges. Take note of key factors such as the percentage of premium allocated to investments, the cost of insurance and other fees and charges, any flexibility for you to switch your investments from one fund to another, the consequences if you do not pay the regular premiums and/or decide to terminate the policy, etc.
Endowment Policy or Participating Whole Life Plans
A long term regular-premium endowment or whole life plan is another common way to help parents save in a systematic and disciplined way for their children’s education. Such plans typically offer insurance protection for the life insured (which may be the child or the parent). The market also offers benefits such as payer’s benefits so that the premiums are waived in the event of death, critical illness or permanent disability of the payer (typically the parents).
Do take note that endowment and whole life policies are long term instruments. If you decide to terminate the policy at the early stages, the policy cash value could be substantially less than the total premiums paid. Do also take note that bonuses are not guaranteed.
Shares and Bonds
If you are familiar with investing and know how to monitor and manage your investments, placing your money in an appropriate portfolio of instruments such as shares and bonds can also be an avenue to help you grow your funds. Common strategies such as dollar cost averaging and diversification can help reduce risks in your portfolio.
Before you invest in any asset, do read the prospectus or other offer documents carefully and ensure that you understand the potential benefits and risks. It is also useful to keep abreast with market and economic developments, as well as keep in touch with research reports and analyst reports. This way, you can have a better understanding of developments that could affect your investments. It is also very important to monitor your investments and take steps to adjust your portfolio where necessary.
This option can be explored if you are very investment savvy and are always reading financial news updates. Again anything that got to do with investment is all non-guarantee. So please understand your own risk profile before investing.
If you like to find out more, drop me an email to arrange a friendly discussion =)
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