Saving For Your Child’s Tertiary Education Fund

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Many Singaporeans know that bringing up a child in Singapore is an expensive endeavour. This is especially true when we think about the education needs of the child as he or she grows. From childcare to university, parents always want the best they can provide for their child, but are you prepared for it?

According to an article on CNBC, Singapore university costs rose 38% within a decade since 2007. Singapore has five major universities: National University of Singapore (NUS), Nanyang Technological University (NTU), Singapore Management University (SMU), Singapore University of Technology and Design and Yale-NUS. Singaporean’s are also spending more on higher education – the government’s Household Expenditure Survey found that Singaporean families spent more than S$1 billion on university tuition in 2014, compared to S$650 million in 2004, according to the government’s Household Expenditure Survey.

For an idea of how much it costs for a Singaporean student to study in the various university, pls refer to the table below:

Tuition Fee Comparison Table for Singapore Citizen AY14-15
(Per year basis)

universityfees

In Singapore, university fees have increased every year since 2010 due to rising operating costs, and the trend is likely to continue. This is why it’s crucial to plan for your kids’ tertiary education fees as soon as possible to avoid falling back on huge loans that can place unnecessary pressure on the young ones. With sufficient prep time, you will be able to have the funds ready when your child needs them. So here are 2 things you can do for you and your child’s future:

1. Calculate how much you’d need

It is not simply enough to base the amount your child needs on today’s university prices. You’d need to take into consideration inflation rate, as well as other lifestyle expenses he/she needs if you plan to send them for overseas education.

Based on a sample calculation of the historical fees paid for an Arts degree in NUS, fees increased by an average of 2% per year.

Assuming your child is just 1 year old, you’d need to set aside $44,847 in 18 years for his university education, based only on tuition fees. This is based on the current fees for a 4-year degree, which works out to $31,400.

Say you decide to set aside a lump sum of $50,000 for your child when he reaches university, you can work out how much you need to save per month:

$50,000/18 years = $2,778 per year or $231.50 per month.

Suddenly, the number looks much more manageable right? In this case, planning in advance definitely helps to ensure you can save enough and comfortably.

2. Consider Your Options

Now that you’ve worked out the amount you need, you can think of how or which way you want to save for the education fund. You have a number of options:

  • Savings account

Probably the easiest way(though not the smartest) is to simply deposit $231.50 into a separate account every month. You’d earn minimal interest; but if you have the discipline to never touch that money, your child can be sure to have that $50,000 to fund his/her university education. If you have some cash upfront, you can also consider putting a lump sum into a fixed deposit account with a higher interest rate.

  • Singapore Savings Bonds

The Singapore savings bond is a risk-free way to save up for the amount you need as well. On top of this, holding it till maturity will guarantee you at 2.12% effective interest per year, helping you to cover the inflation cost. Putting in $20,000 currently will ensure that you receive $4,326 amount in interest by 2027, which means if you can put in a lump sum of $42,000 now, you will be able to make that amount in 10 years!

The downside is of course, not everyone has that lump sum amount. You can however put in a lower amount, since it still pays a better interest rate compared to savings account. Do note that early redemption will likely mean less interest earned.

  • Endowment plan

Endowment plans are designed primarily for saving purposes, hence their returns are not as high as investment plans. However, they are useful for those who need to be sure to get back a guaranteed amount since at the end of the policy, you will get back a lump sum amount.

This is also why it is important to emphasise that with an endowment plan, you will lose money if the plan is terminated before maturity. So before committing to you, you need to be sure you can service the premiums regularly.

You should choose an endowment plan to coincide with the time that your child is likely to need the money. For instance, some endowment plans offer a fixed 20-year term. If your child is already 5 years old, the plan may not make so much sense since you’d probably need that money earlier. In this case, a 15-year term would be more suitable.

There are 2 main types of endowment plans – Lump-sum and Split Payout. The latter offers split payouts which may be distributed along the policy term, such as $4,000 for every year from year 10 onwards.

You need to be extra careful when looking at the “Projected rates of return” – the total payout upon maturity is not a guarantee, just a projection. Thus, in order to ensure your child has the said amount when he/she enters university, you need to look under ‘Guaranteed Returns’. The remaining non-guaranteed value depends on the performance of the insurer’s participating fund. If the insurer revises the bonuses for a policy, the policy values will be affected.

Some parents may feel that the child can take on an education loan when the time comes for university, but this will no doubt add to the financial burden to your child when he/she starts out in the workforce. With an uncertain future, having such a great burden can be a scary thought. Saving up for your child’s education not only helps him/she, but also allows parents to think about their financial future and retirement with more clarity. Want to know more about using endowment plans to save up for a future event? Feel free to contact us here for a non-obligatory discussion.

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