Savings, Thrift & Investment | |
Savings, Thrift & Investment | |
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Monday, October 29, 2018 08:22AM /
OpEd By Damilola
Alonge / Image
credits Dallas Examiner
Millennials
are now becoming fathers and mothers. Some of them enjoyed free education from
government schools and some didn’t. But it is becoming clear that education
provided by the government today is next to sub-standard in terms of quality
and relevance. It is clear that quality education is the divider between the
haves and haves-not. And that is why folks from the diaspora tend to secure
more job opportunities and command higher wages when they return — they are
exposed to far better quality education as compared to their local
counterparts. But today we won’t be looking at the decadence of Nigeria’s
educational system, rather we want to see how we can structure an Education
Fund that will put parents in a better financial position to fund
their children’s education.
Quality
education has become quite expensive as tuition prices are on the rise, and
these prices will likely continue to escalate as your kids get older. Quality
education in Nigeria is no longer a right but a privilege. Parents these days
are struggling to offer their wards the best they can muster and afford and
it’s taking a toll on their finances. But what about if I told you there’s a
more convenient way you can go about financing your kids’ education without
facing a heavy burden all at once? The answer — start building an Education
Fund today!
What is an Education Fund?
An Education
Fund is simply a fund set aside for the education of your child or
children, whether at the secondary or university level. These funds are begun
to be set aside from when the kids have or haven’t arrived. These funds are
more long-term in nature. It’s a continuous and not a one time thing. It’s easy
to say, “oh, I’ll do that later” and all of a sudden payment time is
here!
Now
before I go any further, I’d like to speak to you if you’re single. I’m sure
you’d say to yourself, “I’m not married”, “I don’t have children”, “when I
get there”. But from someone who has advised multiple clients, I’d strongly
advise that the safest and smartest thing to do is to start as early as
possible.
It’s
important you start to factor your unborn kids into to your financial plan from
now cause raising kids can be quite expensive. Moving on!
Secondary
school tuition is a neck breaker. Some schools’ tuition fees are between ₦1m — ₦1.5m per annum for a
child. Meaning for 3 kids in secondary school that’s about ₦3m — ₦4.5m per annum. Wow!
University tuition fees too are not a walk in the park either. Some private
universities charge between ₦800k — ₦1.2m per annum. And for those looking overseas,
tuition fees abroad as an international student ranges between ₦6m to ₦18m per annum. This will
only get higher as our foreign exchange situation likely worsens. And while
planning, the prudent thing to do will be to consider this without any form of
scholarship or grant. So you can see how ‘neck and back breaking’ the cost of
education has become, especially if you plan to pay fees directly from your
pocket without building an Education Fund.
No
wonder most families/persons have no more than two (2) kids nowadays. It’s more
economical and allows for a quality of life. I wanted to have a large family
before, Italian style. I was looking at six children — four boys and two girls;
but economic realities have hit and plans have changed.
Parents
and singles, please start an Education Fund for your children
and unborn children. I know it’s not going to be easy but trust me it will be
worth it. I remember a senior colleague of mine paying his son’s university
tuition with an investment he made in a dollar asset some years back. It was
the yearly interest and not the principal that was being used to cover his
son’s education costs. Stress free, right? He didn’t have to start jostling and
hustling for funds to meet up payments. He didn’t have to start saving for 3 —
6 months before making payments, denying himself unnecessarily or putting a
freeze on all other family expenses. It was effortless! Don’t you just like
that?
Where should you invest your Child’s Education
Fund?
In
this article, we would focus more on setting up an Education Fund for
your child’s university education. Nevertheless, what would be discussed is
also applicable to parents or singles interested in setting up an Education
Fund for their child’s secondary school education. The only difference
would be the time to accumulate would be shorter [typically 10–12 years] and
won’t enjoy the compounding effect long enough as compared to preparing for
university education [typically 16–18 years]. Also, the amount to contribute
would be higher, and draw-downs for payment will be sooner. But asides all
these, the mechanics for setting up an Education Fund for both
secondary school and university education are pretty much the same. Now since
the Education Fund is a long term fund that won’t be used in the
short term, you should look at investing it in a mix of asset classes like
equities, fixed income, USD assets, real estate, mutual funds, etc. A proper
asset allocation that will match the investment objective [Education Fund]
and the tenor is very essential. If you are sending your kids overseas, then
you should consider investing in USD assets that will protect the Fund from
likely future Naira devaluations which can significantly impact the performance
of your investment. Also, your enemy inflation will be at work here again!
Inflation is going to make the money you’re investing fall short of what is
needed to cover your child’s tuition and other expenses. So you need to beat
him by investing at a rate higher than the inflation rate or at the very least
tracks the inflation rate. Another advantage is a friend I haven’t introduced
to you yet — Compound Interest. He’s every investors best friend. I’ll
tell you more about him in my next article. You’d be glad I did.
How much should you have in your Child’s
Education Fund?
Now
this might be a bit tricky as the plan will vary from one person to another. A
person might decide to send the kids to federal or state universities. Another
might decide to send the kids to foreign schools. And others might decide not
to send them at all, opting for coding classes. Others may opt for private
universities. But what you can do is find out how much it costs today, when you
would need the funds, how much you’re willing to set aside and how frequently.
For example: If a client [Afolasade] walks up to me and says, “Damilola, I
have a daughter that I want to give a decent university education, how much do
I need to be investing to meet that objective?”, I usually respond with the
following simple questions;
And
Afolasade says;
So
from the above I can draw a simple investment plan for Afolasade to build her
daughter’s Education Fund for the sake of this article. But
before I do that, I’d like to let you know that there are moving parts to
building a ‘real’ Education Fund — the inflation and exchange rates
are some of the moving parts. The inflation rate can impact the purchasing
power of the currency [USD] in which Afolasade is investing into, and the
exchange rate can also impact the amount Afolasade is contributing to the
investment. For example, the cost of university education in the US today might
be $25k per annum and in 16 years it could have risen to $40k
per annum due to inflationary pressures over the years. And as for the exchange
rate, the Naira to the USD might likely fall in the course of investing in the
Education Fund. For example: Afolasade could be investing $1k per
month which is ₦360k [assuming $1: ₦360]. If the Naira falls
to $1: ₦400, she needs to be contributing ₦400k per month, an
extra ₦40k.
Afolasade’s Investment Plan:
Since
her daughter is 2 years old and would start her university education at the age
of 16, it means Afolasade has a 14-yr period to build her daughter’s Education
Fund. Afolasade would need to be investing a minimum of $600
monthly at 7% per annum for the next 14 years which would give her
c.$168k but after adjusting for average inflation rate of 3.5% [in
USD] over the 14-yr period, Afolasade would still have c.$104k, $4k
above her target of $100k in her daughter’s Education Fund. This
puts Afolasade in a more convenient and comfortable position to meet her
daughter’s tuition fees. She can start drawing down on the Education Fund right
away! Smart, right? Let’s quickly look at another example: Fabian is a single
man who wants to start building an Education Fund for his unborn child. So I
ask my regular questions and he replies with the below;
Fabian’s Investment Plan:
Since
Fabian doesn’t have a child yet, we can estimate he has at least a 16-yr period
[it could be more] to build his child’s Education Fund. Fabian would need to be
investing a minimum of ₦50,000 monthly at 14% per annum for the next 16
years which would give him ₦32.8m but after adjusting for average inflation
rate of 11% [in Naira] over the 16-yr period, Fabian would still have ₦6.1m [₦100k above his target
of ₦6m] in his child’s
Education Fund. This puts Fabian in a more confident and self-assured position
to meet his child’s tuition fees. He can draw down on the Education Fund and
make payments right away! Badass, right?
Now
I must confess that the above investment plans are very simplistic and
straightforward in nature and was done so for easy comprehension, but
nonetheless the principle and concept behind both are sound and practical. In
reality, one or more assets can be combined; assets will be allocated &
re-balanced accordingly; cash contributions can also increase as the earning
capacity of parents increase; and many other factors.
Like
I said earlier, Education is the big divider between the haves and haves-not.
In this era of globalization, children aren’t just competing with their local
peers anymore, they are competing with children across the globe. Are you
preparing your child for the global scene? Are you exposing your child to
quality education that will increase his/her opportunities? Are you creating
the opportunity for him/her to establish the right relationships?
Start
building an EDUCATION FUND for your child today!
About The Author
Damilola
is the founder & CEO of Vayner Box . he brings to bear his
experience in the investment management industry. Follow him on LinkedIn vide Damilola Alonge
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