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 :

	Type	Cost
Foundation	GCE 'A' Level, UK	MYR 25,000.00
Degree	Engineering (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:

Note:
"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	13.00%	MYR 377.88	HIGH
Balanced Unit Trust	10.00%	MYR 484.87	MODERATE
Amanah Saham Bumiputera	9.00%	MYR 525.15	MODERATE-LOW
Fixed Deposit	4.00%	MYR 764.72	LOW
Savings Account	1.00%	MYR 940.89	LOW

Summary

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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Related Post : Planning Your Child's Higher Education Fund...Even If You Are Not Married

Fuel Hike! An Act of Appeasing The Higher Authority!

The recent fuel hike of RM0.20/litre for RON95 and Diesel spark a furor among many Malaysians. Most of us voiced our displeasure and criticism via our Facebook and Tweeter accounts. Then there are, also parodies about the price hike, false promises, BR1M criticism and many more being circulated around the internet. As much as we wish for things to be better and cheaper, deep down we are forced to accept that the recent fuel hike is just the start of many more in the near future. 

Today, TheStar published an article with the following headline:

"M'sia needs to do more to alter negative rating outlook"

In this article, our fuel hike is purely caused by the pressure being imposed on us by international rating agency, Fitch. Fitch having downgraded our country's sovereign rating a month ago from Stable to Negative is threatening further rating downgrades if no action is being taken to prevent our debt level from worsening.

Similar to putting up a show, the quickest way for the Government to appease Fitch is through fuel hike. According to estimates, the 20 cent fuel hike could save about RM3.3 billion annual in terms of subsidy. What the Government fail...or intentionally fail to realize is the avalanche impact upon "rakyat" caused by a 10.5% hike in fuel prices. For sure prices of goods and services are expected to rise over the next few months. Mid level as well as lower income families will be cutting down on their spending which would discourage healthy GDP growth. Easily said, the lesser the "rakyat" is willing to spend, the slower our country's economic growth would be. 

So in an act of appeasing Fitch, the Government indirectly created a bigger negative effect upon our slowing economy growth. Not forgetting with increased price of goods and services, inflation is bound to go up in the upcoming months. Read "Indonesia's Inflation Crisis...Malaysians should learn from it!

What amuses me most is that even Fitch is not impressed with the fuel hike measure as clearly stated in this article from TheStar:

Opps..plan backfired dear PM.

Since the fuel hike, our dailies are reporting claims of increase in price of goods, services as well as property. Among the headlines reported are:
1. New property price to increase by 10% due to rise in cost of raw materials used for construction
2. Price for public transportation to increase by 5% - 30%
3. Food price to increase by 0.1% despite assurance by Domestic Trade, Cooperatives and Consumerism

That aside, another point that I would like to point out is the use of savings from the fuel hike to support BR1M scheme. What good is an extra RM500 or even RM1000 per year when the additional expenditure cause by price increase in petrol, food and services are going to exceed that amount in just a few months? How about abolishing BR1M instead to create some savings for the country?

I do not how many more of such hikes/subsidy cuts will be imposed in the future. For sure, such an action can only temporary appease "certain parties", yet it won't address the fiscal issue in the long run. Money saved from subsidy reduction is not considered income if the money is taken from the rakyat. After all it is the rakyat whom have generously loaned the RM500+ billion to you in the first place!

Instead, proper reforms to reduce the debt should be rolled out to encourage economic growth. Effective measures must be introduced to generate external income especially from foreign investment. Be more transparent on how the recouped money is utilized to boost the economy. Bottom line, the end must justify the means for measures taken.

Cheers!

P/s : Despite my blog's title is Invest Made Easy, I've been writing more about our country's economy over the past few months. Some readers whom are searching for investment tips might be put off when greeted with many articles related to the economic situation of our country. The reason I've been placing much emphasis on understanding on our country's economy and finances is because these factors inter relate with investing. Figures such as inflation, GDP, debt level and sovereign ratings should be our key references when it comes to deciding where we should invest our money. Take for example that if the property price increases by an additional 10% because of the fuel hike and you know there might be further hikes in the future, would you still invest into a property?

Understanding and then writing about the economy via this blog has been a wonderful learning experience for me. I hope that you too find awareness, knowledge as well as wisdom that could assist you in making better decisions when it comes to personal finance and investing!

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Beauty of Compounding Interest

Malaysians in general tend to overlook the power of "compounding interest" when it comes to investing. Many of us are investing with the goal of obtaining a huge amount of profit/gains in the shortest amount of time. Hence we fall easily into so called "investment" gimmick that promises ridiculous returns in the shortest possible time. 

Take for example a gold investment scheme launched in Malaysia a few years ago. The scheme promised about 20% return per month! With such attractive returns and a well organized marketing strategy, many investors were coerced into investing huge amount of money. Alas in 2009, the company managing the investment scheme was raided by BNM for charges of money laundering and illegal deposit taking. I believe investors whom invested into the scheme have yet to get back their investment as all assets belonging to the company running the scheme were frozen by Bank Negara as the trial is still ongoing. Read more HERE.

Now the objective of this article today is not to highlight about the fallacy and greed of investors but to create an awareness that utilizing the power of compounding interest can be a safer and more effective way in building your retirement wealth. 

Albert Einstein once quoted the following;

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”

Despite being a pioneer in the field of physicist, this very person is able to appreciate the power of compounding interest which lead to him naming it the eight wonder of the world. 

What exactly is compounding interest?

Wikipedia's definition as follows:

Compound interest arises when interest is added to the principal of a deposit or loan, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding

Example of compound interest:

Investor A has RM1000 in hand. He decides to place that money into a Fixed Deposit that guarantees a return of 4% per year. What would the total amount he will have 20 years from now?

Calculation:

• Investor A places RM1000 into a fixed deposit account. 
• At the end of Year 1, the 4% return upon invested amount (RM1000) will entitle him to earn an additional RM40 worth of interest. 
• Hence by the end of Year 1, Investor A has RM1040 in his FD account. In order to make use of the power of compounding interest, Investor A does not make any withdrawal and waits for Year 2 to arrive.
• At the end of Year 2, the 4% return would now be calculated upon the amount available in his FD account. In this case RM1040. 
• A 4% return on RM1040 would entitle Investor A to earn an interest of (4% x RM1040) = RM41.60
• Current balance in Investor A FD account now stands at RM1081.60

By not making any withdrawal, Investor A is utilizing the power of compounding of interest. Just by earning interest upon interest, year after year, Investor A's initial investment of RM1000 to grow astronomically as illustrated in this table below:

Initial Amount		MYR 1,000.00
Year	Interest	Amount at Year End after interest paid
1	4%	MYR 1,040.00
2	4%	MYR 1,081.60
3	4%	MYR 1,124.86
4	4%	MYR 1,169.86
5	4%	MYR 1,216.65
6	4%	MYR 1,265.32
7	4%	MYR 1,315.93
8	4%	MYR 1,368.57
9	4%	MYR 1,423.31
10	4%	MYR 1,480.24
11	4%	MYR 1,539.45
12	4%	MYR 1,601.03
13	4%	MYR 1,665.07
14	4%	MYR 1,731.68
15	4%	MYR 1,800.94
16	4%	MYR 1,872.98
17	4%	MYR 1,947.90
18	4%	MYR 2,025.82
19	4%	MYR 2,106.85
20	4%	MYR 2,191.12
21	4%	MYR 2,278.77
22	4%	MYR 2,369.92
23	4%	MYR 2,464.72
24	4%	MYR 2,563.30
25	4%	MYR 2,665.84
26	4%	MYR 2,772.47
27	4%	MYR 2,883.37
28	4%	MYR 2,998.70
29	4%	MYR 3,118.65
30	4%	MYR 3,243.40

Key Findings

• Within 20 years (in yellow), Investor A has doubled his initial investment amount of RM1000 to RM2191.12.
• If he continues for 30 years (in green), Investor A will triple his investment amount of RM1000 to RM3243.40

Key Factors That Effect the Returns from Compounding Interest

1. Interest

The higher the annual interest, the faster the investment grows. For example if Investor A invest into an investment vehicle that guarantees a return of 8% per annum, his investment of RM1000 by the end of 20 years would be RM4660.96. 

At the end of 30 years, the investment value would be RM10,062.66. 

2. Period of Investment

As illustrate in the table, the longer Investor A remains invested without making any withdrawals, the more effective compounding interest would be. 

From the table shown in the sample calculation, you can see that Investor A doubles his investment amount of RM1000 within 20 years and triples it within 30 years based on a fixed interest of 4%

3. Initial Amount Invested

If Investor A were to place RM10,000 instead of RM1,000, the amount he would earn via compounding interest is also 10 times.

Let's illustrate all 3 Key Factors into this table below:

Intial Amount		MYR 1,000.00
	Interest 4%	Interest 8%	Interest 16%
20 Years	MYR 2,191.12	MYR 4,660.96	MYR 19,460.76
30 Years	MYR 3,243.40	MYR 10,062.66	MYR 85,849.88
40 Years	MYR 4,801.02	MYR 21,724.52	MYR 378,721.16
Intial Amount		MYR 10,000.00
	Interest 4%	Interest 8%	Interest 16%
20 Years	MYR 21,911.23	MYR 46,609.57	MYR 194,607.59
30 Years	MYR 32,433.98	MYR 100,626.57	MYR 858,498.77
40 Years	MYR 48,010.21	MYR 217,245.21	MYR 3,787,211.58

Summary

What I have just written is just a basic example of Compounding Interest. There are more complicated compounding interest involving varying frequency of additional contribution to the investment as well as varying interest. I hope to explain further about it in my next article.

As for now, if you are already doing some Financial Planning of your own, you can utilize this method to projected the amount you will have in the future based on your savings kept in FD or in any investment vehicle that promises fixed return yearly. 

Despite the simplicity of compounding interest, it is through sheer patience and discipline that one is able to fully maximize the power of compounding interest. When one projects the returns via compounding interest, one can then truly appreciate the value of their savings and ultimately create a barrier of resistance towards attractive dodgy investment schemes.

Cheers and Happy Investing

If you like reading this post, it would do me a great favor by:
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