Funding Child's Education: The Mistake You Can’t Afford to Make


For most Asian families, education is something that would become an expense item for parents as it is seen as an asset to support their children in the future.     

Fact #1: Education costs increase by at least 15% in Indonesia. If university costs are now Rp 75 million, it will amount to about Rp 600 million in 15 years.

Fact #2: To reach Rp 600 million, one needs to save Rp 2.3 million per month for the next 15 years. This assumes that the savings are placed in a time deposit earning perhaps 5% per year.

Fact # 3: If savings is invested at about 15% per year, one only needs to set aside Rp 1.2 million per month –after fees and other charges.

Approach

Amount need to set aside 

(e.g. to reach Rp 600 million in 15 years)

Save in time deposit

Rp 2,300,000 per month

Investment

Rp 1,200,000 per month

"Clearly, the costliest mistake that parents can make is to not consider higher yielding investments that can either match or exceed the increase in school fees," said Jocelyn Pantastico, LiveOlive Founder and a CFP® professional.

So what are the options for building and securing your child's education?

Mutual fund strategy

According to Pet Hen Ooi, a CFP® and Qualified Wealth Planning professional, those who are not comfortable directly investing in the stock market, mutual funds are a good option for a number of reasons:

1. One can start with smaller amounts, e.g. Rp 500,000 per month

2. It is already diversified or invested in different stocks there is little need to choose individual stocks yourself

3. There are different types, depending on your own appetite for risk.

"Alongside the investment allocation, one should be properly insured through term or whole life insurance so that the child's education fund will continue even if something happens to the parents –death or disability," Pet said.

For those who are concerned about costs and do not mind managing investment and insurance separately, then this is a good option.

Unit-linked strategy

Unit-linked product is actually a mutual fund combined with life insurance. For this, Pet recommends parents to use the "top up" function of unit linked insurance. This way, you are able to reach the investment target and use the premium as the insurance against the risk.

Pet said he would recommend this for those who prefer an "under one roof” approach of managing investment and insurance.

Gold strategy

Gold has been the "go-to" investment vehicle for many Indonesians, especially due to gold prices' phenomenal increase from the year 2000 to about 2010/2011. However, since 2012 gold has again remained stagnant.

That said, there are advantages and disadvantages in using gold to fund your child's education.

"Gold never makes one bankrupt, is globally accepted and highly liquid. One can also purchase it in small amounts, e.g. 10 grams at a time,” Pet explained.

"However, lately, gold tends to have lower returns versus the increase in child's education fees. There is also risk in keeping physical gold at home –burglaries, et cetera," he elaborated.

According to Pet, investing in gold is always a good idea for long-term investment. "For ten years or more, and it depends on the investors' goal, time frame and risk profile.”

Whatever the option, Jocelyn points out the importance of reviewing the performance of the investment, fund or policy at least every year, to ensure you are on track.

"Also consider cashing-in the funds your child will need for the first year of school, one or two years before. This way, you know you are not forced to sell or liquidate at a time when the market is down,” she concluded.

Read more: Are you Ready for the World of Investing?

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