Planning for a child’s education is a major financial goal for parents because of the competitive work environment and rising annual costs. In this article, we look at mapping the route to academia to realise a child’s anticipated career path and how you should, as a parent, evaluate the target costs of children’s education within expected deadlines.
There are three basic elements in a plan, it deals with the future, involves action and identifies who is to implement the future action.
Educational planning can be defined as ‘a systematic process of setting out in advance, detailed strategies through which an educational objective can be achieved’.
You might want your child to excel even more than you did in school and have even greater success than you have achieved. If this is your motivation it is a good start in securing your child’s future success.
As your child gets older it is imperative that they are involved in self-assessment, exploring academic and career alternatives, and making decisions that are personally relevant.
Did you know university costs have tripled in the last 10 years? Below are 5 steps to determine how you should evaluate the target costs of education.
Cost typically include tuition fees (per course or program costs), travel, room and board if the child will be living away from home, living expenses, books and miscellaneous fees. This information is available from the Admissions section of most university websites or you can contact an Admissions Counsellor to confirm this information.
Most parents start putting aside money for their child’s education as soon as they are born. This is the best approach, the earlier you start is the easier it will be on your pocket. Smaller amounts saved over a long period grow with compounded interest. If you haven’t yet started, depending on your personal situation, now would be the ideal time to start.
Research shows that education cost rises at about 10% per annum. With regards to our local G.A.T.E or H.E.L.P. funding you should always consider that it can be reduced or removed altogether and as such you should always plan to fund the entire cost of education so that there is no shortfall.
We can account for this rise in cost each year by the use of a simple compound interest formula which is indicated below:
Target Amount = Amount today X (1 + rate) ^ Time Horizon
Example: Considering myself, the amount I would require for my son today is around $50,000. My time horizon until my son attends university is 9 years and I anticipate a 10% increase in education costs.
Target Amount I need after 9 years = $50,000 X (1 + .10) ^ 9 = $117,897
So, I can see that I need to have available for his university funding around $118,000. The actual figure may be less or more. However, the figure is really a guide to get you started.
This calculation might be a bit intimidating for you however your Investment Advisor can help you with these future value calculations.
Most parents save monthly to achieve the projected value. Based on my scenario, I would need to save $1024 each month for the next 9 years. I arrived at this figure having looked at a conservative type savings plan paying 1.40% per annum in interest. By assessing my personal budget, I can determine how to fund this monthly contribution.
Risk Tolerance: An important step to take is finding out your tolerance for risk. This will determine the type of savings product that is used in this planning process. Someone with a low risk tolerance can choose to save in fixed income funds. Conversely, someone who can take more risk and has a time horizon of more than 5 years can consider equity funds and can potentially target higher returns.
An education plan can be a step by step process with a simple approach you can do yourself. Making it systematic and deliberate ensures that such a goal is not just a wish. However, it’s best to take a collaborative approach with the parent lending support and guidance to the child and an Investment Advisor like those at Guardian Asset Management providing financial guidance to the parent.