“[Kids] don’t remember what you try to teach them. They remember what you are.” – Jim Henson, It’s Not Easy Being Green: And Other Things to Consider
Our children will probably forget a lot of things they learned in school, but for sure they will never forget and always be grateful to their parents for giving them the opportunity to be educated. As responsible parents, I’m sure we all want to afford that opportunity to our children.
Education planning in truth is no rocket science. Just think about this acronym: P.I.I. – Project, Insure, Invest.
Project. I studied college at probably one of the more expensive schools in the country. Around 2003, my annual college tuition on a full load was about P100,000/year. Just recently, my brother-in-law graduated of similar course and during his 4-year stint in the same school, his annual tuition reached P180,000/year. Between 2003 and 2013, the average annual rate of tuition fee hike is at around 6%. That is quite a conservative rate already since tuition fee can increase by as much as 10% in a year. Knowing the current tuition fee and average rate of increase is just half the battle as our real goal is projecting what the tuition fee would be by the time our children starts college. Using the future value formula in a financial calculator/Microsoft Excel, and assuming that our children will start college 18 years from now, college tuition by 2031 on the conservative 6% rate of increase would be: P514,000/year (at 8%: P720,000; at 10%: P1,000,000). If we multiply it by 4 years, total college tuition can amount to P2,000,000 – P4,000,000. The number may seem scary, but with a proper plan in place, this value will not be as daunting.
Insure. Insurance is probably one aspect that is most overlooked when it comes to education planning. The purpose of insurance is to protect our dreams and goals, in this case it is to protect our dream of giving our children the opportunity of having a good education. Assuming we don’t have insurance and we go directly into investing. If we pass away while our child is just in Grade 2, who will pay for the tuition fee while the child is in the middle of K+12? Who then would do the college investing for us? Can your spouse continue paying for the tuition at the same time investing for college? What then happens to our dream of a college degree for our children? It dies with us. For these reasons, insurance is more important than investing.
How much coverage would you need to protect the education of your child? A coverage amount equivalent to the total K+12 tuition plus the total college tuition. Again, the value may seem overwhelming, but you’ll be surprised that there are a lot of insurance products that are cheaper than you think.
Invest. There are a lot of ways to achieve your education dream for your child. It’s just a matter of knowing how fast you’d want to achieve it and how much risk you are willing to take. For one, you can save P110,000 for 18 years without earning any interest and achieve P2M. If you’d like to invest and do a lot of legwork, starting a business could be an option as you can earn from 20% to 40% in a year, but the risk in a business is quite high as many startups don’t even make it through 5 years. Finally, in case you’d like your money to work for you, going into different investment instruments such as the stock market, pooled funds (mutual fund, UITF, VULs) and bond market could be your options. Returns/yields from these instruments on the average can go between 6%-15% annually. Assuming you decided to invest in these instruments and you earn an average of 8% a year, you’d need to invest just P60,000 annually to be able to reach P2M in 18 years. However, much like in any investments, there are no guarantees that’s why reviewing the investment plan would a key step to take in the process.
*Published in Business Mirror – July 29, 2013