If you have decided to save for your child's education expenses soon and realized that getting educational plans or plain savings won't cut it, then this short article is for you. This article will teach you the following:
1) How much do you need for your child's education expenses" 2) How much you need to invest in order to provide for #1
I made an online calculator to make the forecasting easier but there are two values that you need to know before you calculate.
Inflation and Tuition Fee Increase
Commodities average annual inflation is about 5% but tuition fee increases at an average rate of 10% per year. This means that if today's tuition fee in private schools is Php 100,000, then next year expect it to be Php 110,000.
One primary goal in investing is to beat inflation. Plain savings account won't cut it for your child's needs because it will not beat inflation. Since there's no guarantee in any kind of investment, we will trust it's historical performance.
Some investments will make 10% annually while some could even perform from 15 to 20 percent. In our calculation, we will use an average value of 10% but you can refer to your investment average historical performance.
The most important (yet forgotten) factor
Time. Aside from the average annual tuition fee increases and you investment's historical performance, one important factor to take note of is time. The earlier you prepare, the lesser the amount you need to set aside and invest. I would suggest that you consider planning this as early as your child's first birthday.
How to use the calculator
Before calculating the amount you need to invest, make sure you already have taken the values of things we discussed above - tuition fee increase, average investment performance, and number of years before college.
Say the annual tuition fee for a school is Php 55,000. And every year, they increase it on average of 10%. Luckily, since you have read this blog as early as before your first child is born, you still have 18 years of time to invest for your child's education.
The calculator will automatically compute for the future value of tuition fee once your child reaches College. The illustration below shows annual tuition fee values for a 4-year or a 5-year course.
The next illustration shows how much you need to invest ONE-TIME for you to be able to finance your child's college degree for a 4-year course. It means you need to invest an amount of Php 220,000 for a period of 18 years on an average investment return rate of 10%.
If you cannot pay Php 220,000 lump sum, you may want to opt for an annual investment amounting to Php 24,386.04 for 18 years at an average performance of 10% per year.
Prepare for your child's need
It really is very expensive to send a child to school especially College. You should also consider other expenses such as allowances, school supplies and other miscellaneous expenses. But when you have prepared for it, the burden is lessened and you can sleep soundly at night knowing that your child will be able to take periodical exams and will be able to enroll the next semester without hassle. Or is it not?
Useful Links: Philippine Inflation rate - http://www.tradingeconomics.com/philippines/inflation-cpi Sunlife Philippines Equity MF Performance - http://www.bloomberg.com/quote/SNCPPEA:PM