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Investing for your child's higher education? - 7 important points to consider

Saving for their children's higher education is perhaps the number one financial priority for parents in UAE. 

As they have more reasons to worry about their education costs than most parts of the world. 

If you are like me, keen to choose and invest in the best education savings plan for your child(ren), then I would recommend considering the following;

1. Decide where your child(ren) is/are likely to study 

When speaking with parents about their children's higher education many parents(especially with young children) are not sure where and what kind of education their children may want to pursue.

Which is fair to a large extent, as it is difficult to predict the future...

However, it is important to plan early and start saving for your child's education to be able to create good opportunities for them.

You can begin with shortlisting the most likely destinations(Countries) within your income range...

The following chart shows the most preferred destination for parents and students in UAE and the average annual cost of education and cost of living as of 2016.

Education Savings in UAE.png

It must be noted that these figures only represent average costs, and may be higher or lower for particular Universities and situations.

India is also a very popular destination among NRI parents; however, the steep competition for seats in preferred colleges/universities and higher fees for NRI children are forcing parents to consider other destinations.

Once you have shortlisted the most likely destinations, you can choose the one with the highest cost as your education savings goal.

For example, the likely destinations for you are UAE, UK and Canada, then you must be looking to save $35,000 * 4 = $140,000 plus the inflation.

This process gives you a number to work with.

2. How long have you got?

Once you have chosen the likely destinations, you must determine how long you have to save for your child's education.

For Eg: If your child is 3 years old and is likely to attend University at age 18, how much time have you got?

If you said 15 years, you are mathematically correct, but in real life do you actually have 15 years?

Our brain is wired to put off; working for events which will happen in the distant future, so by thinking about your child's graduation as something which is going to happen after many years, you are actually telling your brain to procrastinate…

But in reality, you do not have 15 years…

Let me ask you, how many salaries do you get in a month, what a dumb question isn't it? obviously one salary..

So 12 months in a year and 15 * 12 equals to 180 months, You actually have 180 salaries and not 15 years.

As each month & salary passes without savings, you are making it more difficult for yourself.

When you start early you give your money ample time and room to work hard and multiply.

3. Impact of inflation!

Inflation is like a hungry monster, constantly eating away our savings for breakfast, lunch and dinner.

As inflation increases, every dirham/dollar you save will buy a smaller percentage of goods and services in future?

It is important to estimate the likely inflation on the university fees and invest your savings in assets which offer a yield higher than the prevailing inflation. (Real Return)

Inflation may largely vary between where you are now and the likely education destination, in this case, it is important to take into account the inflation prevailing in the preferred destination.

For Eg: If the prevailing inflation on higher education is 5.00% in the UK and your child is 3 years old, he will start University in 2032.

if the cost of 4-year graduation is $140,000 as of 2016, it would approximately be $305,000 in 2032.

If you are planning to graduate your child in the UK you will have to save $305,000 in the next 180 months.

The following table provides approximate monthly savings required to reach this goal at different rates of return

Rate of Return Monthly Savings Required for 15 years
3.00% $1,345
5.00% $1,150
7.00% $945
9.00% $795
10.00% $725
12.00% $610

4. When to start investing?

The rate of return and the period of investment determines the growth of your money. The longer you are invested higher the growth. 

The following chat shows the growth achieved on an investment over different periods;

Monthly Investment Growth rate  Time Invested Maturity Value
$1,000 9.00% 5 Years $75,273
$1,000 9.00% 7 Years $115,718
$1,000 9.00% 10 years $191,088
$1,000 9.00% 12 Years $253,318
$1,000 9.00% 15 years  $369,284

The best time to start investing is now. 

5. Investment Attitude

As an investor, you have many options to choose from; when it comes to investing in your child's higher education. The risk and reward of each investment opportunity differs from one another. 

You must carefully analyze the risks involved in a certain investment, before signing up for it. Many investment plans are withdrawn early, because the investors did not do their due dilligence before signing up for the plan, and later realized that they did not mean to invest in such a plan.

In order to aviod this confusion, obain a copy of the term and conditions booklet of the plans you have shorlisted for investing,  read and understand the scope and limitations of the plan.

Have a detailed discussion about the the underlying assets of a plan for Eg: Equity Funds, Bond Funds, Fixed Income Funds, ETF's and other funds

In UAE you have 3 types of investment plans for education savings;

  1. Capital protected with fixed and guranteed bonus
  2. Capital protected with variable bonus
  3. Market linked investments

Based on your goal, time left and attitude to risk, select the most appropriate one.

Do remember that it is your responsibilty to choose the best option, there is no use blaming others if you end up buying an investment which doesn't suit your needs and attitude.

6. Include Potection

When invesitng fo your child's higher education also avail life and crtical illness insurance to make sure that the goal is met even if you are unable to pay premiums in future.

The following are the most suitable protection plans for protecing your education savings goal;

  1. Endowment plans
  2. Term Insurance

7. Professional Advice

Damodhar_Mata_01_round.pngAs a Qualified and Independent Financial Advisor; I am able to comprehend your goals and attitude towards investing and recommend suitable investment options helping you achieve your goals.

You can arrange a Free Consultation to understand if we can work together in addressing your investment/protection needs and goals.

Let me help You Achieve Your Financial Goals.png

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