The COVID-19 pandemic has created huge challenges for parents, their children, schools and their teachers. There is hardly anyone whose income has not been affected by the current situation with so many suffering a significant drop in income and much uncertainty ahead. The stakeholders each face different challenges that impact all.
Many school proprietors worry about the impact of parents being forced to withdraw their children. Many private schools are providing remote teaching and support programmes for their pupils, trying to ensure a quality continuation of their pupils’ education. Many have had to keep their facilities open albeit with skeletal staff to maintain and secure the premises at significant cost.
As incomes drop and jobs continue to be challenged, families naturally expect some reduction in fees. On the other hand, schools are keen to retain staff to ensure that the institution remains a well-resourced and thriving community that can continue seamlessly once the crisis is over.
But no one knows when things will return to any semblance of normalcy and this essential community has been hit very hard. Schools must thus strike a balance between supporting their parents and securing their own futures.
The big question for parents is, how will I fund my child’s education? For the vast majority of parents, this ranks as one of the largest expenses you will ever face with cost increases of between 10 to 15 per cent each year.
The key to funding education is to start early so that you can benefit from a key ingredient of investing; time. Time gives your money an opportunity to gain from the power of compounding. Start saving towards your child’s education once you plan to have them; even before they are born. Time matters.
Paying school fees on an ad-hoc basis without any advance planning will cause huge financial strain, unless you already have significant income and savings. An early start protects you from the shock of a pandemic or other catastrophe. A delayed start not only yields a much weaker result but can also jeopardise other financial goals such as your home ownership or retirement goals.
When your child is young, you have the benefit of time to select investments that offer the benefits of compounding and the prospect of higher returns that have the potential to outpace inflation and increases in education costs.
If you only start investing for your child’s education in your 40s, you are likely to fall short of the required amount and be forced to dip into retirement savings to fill the gap. This is a precarious situation that comes with huge risk. You are responsible for your own retirement and cannot afford to assume that your children will be willing and able to fund your retirement in the comfort that you expect or indeed deserve.
An early start in educational planning and funding will not be enough. How to invest is a critical question. What are your options? Once you have an idea of the type of educational future you would like for your child, do not feel pressured to send your child to the most expensive school; it is not necessarily the best for your child. The most suitable choice largely depends on your own unique family circumstances and goals. This will be determined by factors such as your income and savings, your child’s age and ability, how soon you will need the funds, and the amount you wish to save. Here are some options: The yields on short-term money market instruments even though the returns are assured, cannot meet longterm goals. Equities come with greater risk, but have been shown to produce far greater long-term results. Experts suggest that a high level of equity is necessary to counter the high rate of education inflation as well as the effects of any currency devaluation.
Be careful and be conscious of your risk tolerance and time horizon. If you have a time horizon of less than five years, you will have to rely primarily on fixed income instruments, even though they are likely to offer a lower rate of return. They offer guaranteed returns and safety of capital. In the short term, these are important factors to consider.
Think long term. The stock market is generally regarded as a strong option for long-term investing; stocks have historically outperformed other investments over the long term. In the short-term, they can be volatile. If your plan is to put money away for your child for say, 10 years and more, then it is well worth considering investing directly in a professionally managed portfolio of blue chip stocks or an equity mutual fund.
Mutual funds are pooled investments in a wide range of shares. They offer diversification and are easy to liquidate when you need cash. Your fund choice will typically depend on factors such as your child’s age, your risk tolerance, and your ultimate financial goals.
As your child gets closer to starting college, two to three years before they are due to start, the less risk you can afford to take because preservation of capital takes precedence over earning a high rate of return. If you leave the money in the stock market until just before you need it for school fees, you may be forced to sell stocks at a loss. It makes sense to begin to shift your money into more conservative investments that reduce your exposure to market volatility; lower-risk bonds and money market accounts present a safer option.
Carefully considered real estate investing is an outstanding asset class that over time provides three main sources of funding: you can sell the property, earn rental income to pay school fees and other costs, or borrow against a property. If you own property that has appreciated, you may be eligible to borrow a percentage of your equity, which is the difference between the market value of your property and the outstanding mortgage loan.
Avoid going into debt to fund your child’s education unless there is no other option, if it is interest free or where you have the capacity to service the loan comfortably.
Once your portfolio is in place, review it at least once a year to check whether you are still on target to meet your goals. Remember, it is not just about tuition fees, it is also about living and travel expenses. Periodically, one must check whether your portfolio is on track to meet the goal. You cannot afford to let a downturn in the stock market jeopardise your child’s college education.
Do not overlook the possibilities for scholarships and grants as a source of funding particularly if your child is able to attract such opportunities. From their earliest years, you ought to have identified in them, a unique skill or talent in a particular area – technology, music, drama, sports, or they may be exceptionally gifted academically, thereby making them eligible to compete for a scholarship or a grant.
Have you considered an educational savings plan? Leading insurance companies in Nigeria offer educational plans that can help parents avoid the sudden and huge expenses that come from inadequate planning. An education protection plan ensures the continuation of a child’s education should their sponsor become critically ill, disabled or die.
An educational trust is simply a trust established with the sole purpose of providing funding for education. At the appropriate time, distributions or withdrawals can be made from the trust to fund the education of beneficiaries.
Some private schools allow you to pre-pay school fees several years in advance. This is tempting, as you lock in costs and do not have to worry about the rising costs in the future. By tying down your capital, you forfeit the opportunity to find more productive outlets for your funds.
It is important to teach economic responsibility at a young age and such income can supplement whatever you are able to provide for their personal expenses. Encourage your children to earn and contribute at least a part of their expenses. This will make them gain financial independence.
As with any other investment goals, time is of the utmost importance. The sooner you start the better. The key is to start early, contribute regularly, and invest wisely. Education is one of the greatest legacies you can leave your child. Make planning for it a priority.
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Nimi Akinkugbe has extensive experience in private wealth management. She seeks to empower people regarding their finances and offers frank, practical insights to create a greater awareness and understanding of personal finance.
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It is important to teach economic responsibility at a young age and such income can supplement whatever you are able to provide for their personal expenses