Their children’s education is one of the biggest cash outflows that parents must plan for. It is also one of the most important and worthwhile investments you can ever make. With the inflation rate close to 20 per cent and the drastic loss of value of the naira, a huge concern for Nigerian parents is about how to fund their children’s education whether in Nigeria or overseas. Whilst it is true that financing your child’s education comes with challenges, these can largely be overcome with careful long-term planning and taking the right steps.
The most obvious solution is to start saving early. By doing this, there is the prospect of growth through the power of compound interest; indeed it is over time that compounding works best.
A delayed start not only yields a smaller fund, but it can also jeopardise other financial goals. If you only start saving and investing for your child’s education in your 40s, you are likely to fall short and be forced to dip into your retirement savings to fill the gap; this is risky. Remember, just because you have funded your children’s education, there is no guarantee that they will be willing or able to look after you in your old age.
What are your options?
In order to accumulate enough money to finance your child’s education, it is not enough to start early, it is also important to invest right. Education funding is not a short-term expense; indeed it is a long-term commitment that can stretch well over two decades depending upon how far they choose to go, and of course how much you can afford. Here are some of the options:
If you have a time horizon of less than five years, it is best to rely primarily on fixed income securities, which are likely to offer very low yields, which will hardly keep apace with inflation. However, these offer guaranteed returns and safety of capital. In the short term, these factors become very important as you need easy access to your funds when you need them. Money market funds, Treasury bills and fixed deposits are some of the instruments to park short-term funds to meet bills over the next one to three years.
Include bonds in the mix. The yields on bonds are typically more attractive than what you would obtain in your bank deposit. If you do not need the money immediately, bonds will give you a relatively better return without the attendant risk, of course depending on the issuer. For education funding, parents can predict their investment earnings and determine how much they need to contribute to accumulate the fees by the time college starts.
Whilst many people are nervous about investing in the stock market, it is still generally regarded as one of the best options for long-term investing; in the shorter term, it can be risky and volatile. If you have, say over 10 – 15 years left before your child starts college, stocks should be considered in the portfolio mix. Over such a long period, you are able to ride much of the volatility. Your risk appetite, the length of time you can afford to invest for, will determine how high your allocation to equities might be. Equities are necessary to counter not just the general rate of inflation but education inflation as well, which can be as high as 10 – 15 per cent per annum.
Mutual funds are one of the most popular investments and using this as a vehicle to help fund a college education is a good option. Your fund choice will generally depend on factors like a child’s age, your risk tolerance, and ultimate financial goal. There is a broad array to choose from, including money market funds. Stock and stock funds historically have generally outperformed other investments over the long term. These pooled investments give access to a wide range of shares so spread the risk. If you have the time, inclination and expertise, you can consider investing directly in stocks.
Have you considered an educational savings plan?
Insurance is a very useful tool that is often ignored when it comes to education planning. Yet, leading insurance companies in Nigeria offer educational savings plans that help parents prepare for their children’s education over time to avoid the sudden huge expenses that come from inadequate planning. The Education Protection Plan ensures the continuation of a child’s education should their sponsor become critically ill, disabled or die.
Investing in property to fund education is a time-tested method as this asset class provides three main sources of funding opportunities; you can sell the property, use the rental income to pay school fees and other expenses, or borrow against a property.
If you have built up equity in your property, you may be eligible to borrow a part of it; this is the difference between the market value of your property and the outstanding mortgage loan. Be mindful of the fact that the interest rate is comparable to other borrowing options so be careful; with interest rates in the twenties, this can become a huge strain. Consider this option only where you have the capacity to service the loan as if you default, you could lose the property in a foreclosure.An educational trust fund is another option; it is simply a trust established with the sole purpose of providing funding for education. Essentially, the terms of the Trust provide that deposits or contributions to the Trust can be made periodically and the funds are managed by a trustee for the specified educational purpose. At the appropriate time distributions or withdrawals can be made from the Trust to fund the education of beneficiaries.
Review the portfolio
It is not enough to invest and go to sleep as all investments come with risk. Ideally, a diversified portfolio should be reviewed periodically, and certainly at least once a year to ensure that it still meets with your objectives. There are two components to educational planning: The costs of tuition and living costs. Is the portfolio performing and still on track to meet your goals? Is your original estimate of costs still valid or does it need adjusting.
If the numbers aren’t adding up, you may need to increase your investment. As always, it is important to seek professional advice before you invest.