Plan to fail and fail to plan

I wonder how often we have heard this quoted, not fully appreciating the impact it has on our children and their future?

 

Building upon last month’s article on investing, the same principles would apply here on how best to secure your child’s financial future and it definitely pays to plan ahead.

 

Living in Dubai, most people are aware of the cost of schooling their children which can cost anywhere in the region of 30,000 – 50,000 AED per annum, per child. However, with many Ex-pats this can often be tied in with the employment contract and will not be an obligation to worry about initially. With increasing costs of schooling and a massive university fees hike in 2012 - it pays to take charge and start planning now.

 

If you plan ahead and start saving early, it will be far easier to achieve the desired amount your child will require for the best education and start in life. For instance, if you start an Education Saving Plan when your child is born; for 18 years, you will only need to contribute $400 to achieve $128,000 at an assumed growth rate of 5% p.a. However, if you leave planning until your child is 13 years old, you will need to contribute over $2,000 for 5 years to achieve a pot of $128,000. This is a considerable difference and that’s for a modest university. Top American universities currently charge $50,000 per annum; therefore a 4 year course would set you back $200,000 without the living expenses on top.

 

Now those who have read my previous articles will have heard me joke that $200,000 is the cost of a brand new, gleaming red Ferrari. So next time your little one is hurtling around the living room getting under your feet, just think of a Ferrari, paintwork glistening in the sunlight on your driveway and appreciate how much your little angel’s education is going to set you back.

 

So how do you start?

 

Below are my top tips on how to prepare:


  1.   What are the costs?

They differ between university, country and the type of degree with today’s costs ranging from $10,000 to $50,000 a year and that’s just the fees! Remember, when they are little, you don’t know whether they will be suited to academia or do a 7 year doctorate. You have to know that it is not going to get cheaper.


  2.   Plan ahead:

Our Children typically go to university when you are aged between 45 and 60 years. Having no savings specifically set aside for this can seriously affect our life and retirement plans. Certainly, you will have come across advisers here who sell you a long term plan with the flexibility to take money out which sounds very attractive. But have they explained the implications and are you prepared to pay the price?

  3.   Remember to factor in inflation:

The average rate of annual increase in private education fees is 6% – which means that the fees will double every 12 years. Cast your mind back to last month’s article and the Power of 72. If in doubt look on YouTube or speak to your adviser.

  4.  Consider currency risk: 

You can reduce currency exchange risk by building your savings in the currency of where you wish your child to be educated. The Indian Rupee has gone through a roller coaster ride recently. If your savings had been in Rupees whilst education costs were in USD, you would have experienced the pain of a near 30% loss.


  5.   Ensure you know what your total outlay will be: 

Remember to take account of fees, accommodation the daily cost of living and the occasional flight to see mum and dad; assuming dad is not still not sore about the dreamed of Ferrari!     
 

  6.   How flexible are your plans?

Regardless of where you live, your education savings should give you freedom to move between jobs, countries and even to change the university or school of your choice.

  7.   Plan for the unexpected: 

Life assurance can provide vital added protection to pay fees in the event of death, accident or serious illness. You may start off with intentions of saving for 10, 12, 15 years; however life has a habit of throwing a curved ball. Be well positioned for the unexpected.

  8.   Think carefully before you place your money in a financial product: 
Assess whether it meets all your needs, how much you can afford to set aside, the rate of return you need and how much risk you can afford to take.

 

  9.   Review regularly and make adjustments:

If you already have funds set aside ensure you monitor progress at least once a year.
 

10.  Nearing the start date?

At least 5 years before the university starts consider incrementally moving your investments into more secure assets.
 

 

 

 

About Andrew Prince:

Andrew Prince is a Financial Planner at Acuma Independent Financial Advice. With a technical background, Andrew uses his 20 years’ experience as a Financial Planner for the benefit of the client. Holding the Chartered Insurance Institutes Advanced Financial Planning qualifications, Andrew has been helping clients in the Middle East since 2010. Previously, he ran his own FSA-authorized company in the UK specializing in investments, particularly in conjunction with trusts and estate (tax) planning. 

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