Wednesday, 11 September 2013

Simple Guide On How To Start Your Own Child Education Plan

One key request many Malaysian make when engaging a financial planner is setting up a child education plan for them. Starting up a child education plan as early as possible is the best basket of savings one can have especially when the plan is executed early. The sooner one puts the plan in action, the easier it is for one to ensure sufficient funding when the need arises.

The Dilemma

I spoke to a mother of a brilliant child yesterday and the result of that conversation drove me to dwell further about child education plan. To simplify the entire conversation with this lady, I will state the main key points of the conversation:

1. The lady is in her fifties and while her husband is a retiree living on government pension.
2. Both lady and her husband have no EPF savings
3. The son obtained entry to a prestigious university in UK and the fees for the degree is 24,000 pounds per year (approximately RM124,000)
4. The 4 year degree would cost the lady and her husband approximately RM496,000 (excluding living expenses)
5. The son is very interested in obtaining this degree that was offered to him. As proud parents, both the lady and her husband would do their very best to ensure that their son obtain the best possible education despite knowing that the tuition fees would burn a deep hole in their retirement savings.
6. PTPTN does not offer loan for overseas degree course.
7. The lady and husband are considering to remortgage their home as their last resort if their son fails to obtain a scholarship.

From that conversation, I wish to point out the following:
1. The lady and her husband were unprepared to face a situation where their son was offered a degree overseas. I believe the couple would have set aside certain savings plan sufficient to pay for a local degree only.

2. With no EPF contribution, the couple has no alternative fund to withdraw from. Even if they do have EPF to withdraw from, the amount might not be sufficient as the average EPF savings for Malaysian at age 55 is approximately RM115,000 (RM230,000 for husband and wife)

3. Remortgage their home which they have both slogged 20-30 years to complete the payment adds an additional burden to their retirement monthly expenses.

In all honestly, I believe many parents are facing similar problems today. Child Education could be a bane for many whom failed to plan early. The consequences ranges from bearing additional loans during retirement years, living an uncomfortable retirement or to a certain extent sacrificing their child's potential to have a proper education. These are norms faced by many mid and lower income families at present and not surprising, the future too.

What exactly is the Cost of Education in Malaysia?
Let's take a look at the present cost of education in Malaysia based on figures from "Malaysia Handbook (7th International Edition)" published 2007.

1) Pre University Education

2) Bachelor's Degree Program
    2.1) 3+0 Degree Program at Private Colleges /Private Universities

    2.2) Bachelor's Degree at Foreign University Branch Campuses located in Malaysia

    2.3) Bachelor's Degree at Malaysian Private Universities

3) Twinning Degree Program

Creating A Simple Education Plan
Now that we have a list of estimated tuition fees for pre-university and bachelor degree in Malaysia for year 2007, let's create a simple education plan.

Step 1 : Start by Identifying the Total Cost for Pre-University and Bachelor Degree (take the highest value from the range given)

Sample :
GCE 'A' Level, UK
MYR 25,000.00
(3+0 Degree Program at Private Colleges /Private Universities)
MYR 65,000.00
Total Cost
MYR 90,000.00*

*Cost of Sample Foundation and Degree in 2007.

Step 2 : Calculate Cost as of Present Year (2013)
Since the cost given in the sample above is for year 2007, we need to find out the present cost for the same foundation and degree above.

Assuming Inflation is 3% per year, the present Cost of Education (2013) can be calculated using a Savings Calculator as shown below:

"Initial Balance or deposit" is treated as "cost of education in 2007"
"Returns on Savings (Interest Rate)" is treated as inflation per year
"Number of years" is treated as the number of years from 2007 to 2013 (6 years)

Cost of Education for 2013 (present) after factoring in inflation : RM107,464.71

Step 3 : Projecting Into The Future
Assuming that your child is 5 years old now. He or she will be attending pre-university at the age of 18. With 13 years to go, we will use the present value of RM107,464.71 to project the cost of education 13 years into the future.

Inflation is the key culprit leading to the increase in the cost increase. Therefore we will be using 3% per year inflation for this calculation,

Using the same Savings Calculator, the projected value would be:

Cost of Education in 2026 : RM157,815.55

Step 4 : Start Your Savings/Investment Child Education Plan 
After completing Step 1 to Step 3, you now know the objective/goal is to:

"Accumulate RM157,815.55 within a period of 13 years in order to provide an A-levels pre-university education and an Bachelor's Degree in Engineering from a Private University for your 5 year old child."

In the context of accumulating RM157,815.55 within a period of 13 years, we intend to find out the monthly contribution via available passive options of savings or investment.

Scenario 1 (Saving/Investing via Bank Fixed Deposit Rate)
Target : RM157,815.55
Fixed Deposit Rate : 4% per annum
Initial Starting Amount : RM1,000
Period of Investment : 13 years
Monthly Contribution : ?

Using the "Save A Million Calculator", we can determine the monthly contribution as shown below:

To shorten the calculation, I've taken the initiative to summarized into a simple table the available passive savings/investment options, the expected monthly contribution as well as the risk level taken in order to achieve the above mentioned goal:

Type of Passive Investment
Expected Returns Per Annum
Expected Monthly Contribution
Risk Level
Equity Based Unit Trust
MYR 377.88
Balanced Unit Trust
MYR 484.87
Amanah Saham Bumiputera
MYR 525.15
Fixed Deposit
MYR 764.72
Savings Account
MYR 940.89

As what many financial planners would repeatedly advise, creating a child education plan is easy, sticking to the plan is what many families fail to do. In addition, selecting an investment option for your child education could also be a challenge in terms of exposure to risk related to the investment. If you are serious about utilizing unit trust as your investment option, I would recommend that you read the following article "Dollar Cost Averaging in Unit Trust, Is it Practicable". 

Cheers and Happy Planning!

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