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Dad, where are my savings?
The earlier you start saving the better, and by taking appropriate advice, your child will have the best chance of going to their preferred university, with most or all of the fees paid by your savings plan says James Thomas
October 22, 2012 2:31 by kippreport
I regularly receive inquiries from clients who have just had or are about to have a baby, wondering how best to provide for their baby’s future. It’s never too early to learn about what options are available, and what to consider when considering a savings plan for your child.
The arrival of a child is one of the most important events that will occur in your life, and while the joy and happiness that accompanies the arrival is completely understandable, the child is also likely to be one of your largest financial commitments, and you need to plan for that to make sure your child has the best start in life.
Before even considering saving for the child’s future, I would always recommend reviewing your life insurance. It is vital to have the safety nets in place to protect your family from all eventualities. Do you have any cover in place? If so how much, and is this now enough? This is an individual matter, as everyone will need different levels of cover.
Also make sure your child is added to your medical insurance. Most insurers will offer cover for the child for the first 30 days of their life but they then need to be added to the policy to protect them.
Once these areas have been reviewed and appropriate action taken, we can then look at savings options. There are a number of issues to consider regarding how to plan for your child’s future. What are you looking to plan for? Is it primary, secondary or tertiary education, or indeed a combination? Each level of education has a different age horizon from five to eleven to eighteen years.
Each level of education generally costs more than the previous level, and trying to gauge the cost can be difficult, but from a quick poll of a handful of schools, primary education seems to cost from Dh20,000 to Dh40,000 per annum, while secondary can cost up to Dh80,000 per annum. University costs are harder still to project, as it depends on which course, institution or indeed country. The University of London, for example, charges 50,000DHS to 100,000DHS per annum, with living costs on top of that. It is also worth noting that education costs generally increase at a faster rate than inflation, so this needs to be taken into account.
The majority of clients that I have discussed this with prefer to start planning for secondary or tertiary education simply because it is further in the future, and they have time to start building a suitable fund.
The most popular way of planning is to save on a monthly basis, in a similar way that you might do for your retirement planning. It can be more efficient to combine your children’s education planning with your retirement planning, to reduce the fees involved in having multiple policies.
As part of a financial review, we would establish how much you can afford and wish to contribute to your child’s education. As I previously mentioned, this is usually by way of a regular monthly contribution, but it could also include a lump sum.
The next stage would be to select a provider that offers the most suitable product. The selection criteria would include a number of factors, including fees, fund choice, access to funds to pay for the education, financial strength, flexibility of the contract, and competitiveness of the contract compared to its peers.
Once a suitable provider has been selected, the next stage would be to carry out a risk analysis to help design the mix of funds that the contributions would be invested into. Generally with medium to long term investments, the best returns are achieved by investing into a basket of mutual funds, as in the past they have produced better returns. However with any investments, generally the better the return that the fund achieves, the higher the risk you have to take. By investing into a wide range of funds, this will help to diversify your investment, so reduce the overall risk.
This approach will not completely remove the risk though, but I would always advise to continue to invest when markets are falling as well as rising, as the overall effects of both situations will balance each other out. By way of example, investing through the past year or so has seen large swings in investment values, but by investing regularly, most portfolios have largely recovered from the depths of the lows seen late last year and earlier this year.
In summary, the earlier you start saving the better, and by taking appropriate advice, your child will have the best chance of going to their preferred university, with most or all of the fees paid by your savings plan.
James Thomas is Regional Director at Acuma Independent Financial Advice.