A university education is now the second largest expense parents will have after buying a home. It’s a big financial stress, but it doesn’t have to be if you plan right and avoid some common mistakes.
Post-secondary education expenses are out of control! It’s no wonder parents feel torn between wanting to give their child the best opportunities and sacrificing other financial dreams. We recently teamed up with Saijal Patel, Founder and CEO of Saij Elle, an education and consultancy platform to help women build financial wellness. She talks about the five common mistakes she sees parents make when saving for their children’s education and why they are no-no’s!
When it comes to investing in their children’s education, parents in Hong Kong spend the most. From the primary years through university, moms and dads will fork out, on average, US$132,000, according to HSBC. In fact, 90% of parents help fund their child’s university education and almost as many are will to make personal sacrifices to do it.
It’s not surprising that they want to provide their son or daughter with the best chances to reach their potential. However, with the hefty price tag that comes with it, cutting back on a few vacations or hobbies may not be enough to pay for the expenses.
There are five common mistakes parents make when trying to save for their children’s education. Avoid these, and you can be sure you’ll be able to give your child the opportunities he or she deserves, without breaking the bank or going grey!
Mistake #1: Parents Forget To Include Education As Part of Their Overall Financial Plan
Most people don’t plan for their financial goals. So guess what? They fail to achieve them. A recent HSBC survey showed that more than a third (35%) of parents wish they had started saving earlier, and a quarter said they wished they had put more money aside for their child’s education.
Include education funding as part of your overall financial plan by writing down how much you’ll actually put away, and how often. Then do it, and review your plan to adjust for changes in life’s circumstances. You’ll have several competing goals, and then some as a family. Over the course of 10 to 20 years, in addition to paying for your children’s education, you’ll likely buy a home, own a few cars, take vacations, and save for retirement. Without a plan on how much you’ll allocate for the education piece, you’ll become easily distracted by other priorities. The last thing you want is to be scrambling to come up with a pool of money for school or forgo buying something equally as important. Include education funding as part of your overall financial plan.
Mistake #2: Parents Forget To Invest The Education Savings
The fastest and most effective way to grow the education fund is for parents to invest it in assets that generate a higher rate of return. Unfortunately, most will keep it in a savings account. Savings in a bank account, especially in today’s low interest-rate environment, generates very little or no return. In fact, with the cost of tuition rising faster than the rate of inflation, you are actually losing the value of your savings in real terms. Investing an education fund in investment products (mutual funds, insurance-linked securities etc.) that produces a good return gives you the advantage of compounding. In other words, your asset’s returns also earn a return, whether that’s interest or dividends, creating a snowball effect. It also means you can invest less and actually have more because your investments are doing the work for you.
For example, suppose you start putting away US$1,200 a year when your son or daughter is 5 years old towards their school fund. In a savings account in Hong Kong earning virtually no interest, you can expect to have $15,600 ($1,200 x 13) by the time he or she turns 18 years old.
Now, assume instead of keeping your money in the bank, you invest the money in an equity mutual fund that generates on average 6% return on your investments. In 13 years, you’ll have $26,600. That’s a difference of $11,000! And the earlier you start, the higher the return you make, and the more often you invest (monthly vs. yearly) the bigger the pile you’ll have.
Note that, depending on your citizenship and residency status, you may be able to take advantage of tax-deferred or government-sponsored plans geared towards education savings. For instance, in the U.S. there’s a 529 plan, education savings plans in Australia, and registered education savings plan in Canada. You’ll want to check with an advisor or tax accountant in your home country on the rules and restrictions. And if you’re not sure what to invest in, If you’re not sure what to invest in, speak to an advisor who will be able to guide you based on your risk tolerance. And don’t forget to ask about the fees they charge to invest your money as these take away from the returns you generate.
Mistake #3: Parents Underestimate The Costs
As seen earlier, university tuition fees are not cheap. Fees in Hong Kong are anywhere between HK$75,000 to HK$120,000 (US$9,700 to US$15,400). If you’re planning on sending your child overseas, the costs could be double or triple. For example, the average cost of one year in a U.S. college was US$35,000 last year.
The aforementioned is in today’s dollars. Schools are increasing their yearly fees by a few hundred dollars to a few thousand dollars. That’s just the tuition costs. Then there are the flights between school and home, boarding or living costs, books and much more to account for. Today’s fees will not be the same in 10 or 20 years so, be sure to account for inflation, and every few years do your homework on costs. After all, it’s better to have saved too much than not enough!
Mistake # 4: Parents Forget To Encourage Their Child To Apply For Scholarships
Scholarships reward academic success or specific talent and skills. If your child is gifted or caters to a specific niche, apply for a scholarship. There’s no downside, but the upside is that you’ll receive extra financial support. Plus, being granted a scholarship, especially if it’s a prestigious one, can help your child stand out against other students when applying for internships, in-house programs and job opportunities.
Mistake #5: Parents Let Emotions Rule Their Choices For University
Many parents will be stuck on the prestige or location of a university they want their child to attend. There is nothing wrong with wanting to give your child the best opportunities but don’t go broke over it. There are options that can also give your child a great postgraduate education and boundless career path.
For example, a growing number of parents (60%) are considering a university degree that is partly or completely online. The obvious benefits are that it saves them a bundle in living costs for their child, and typically the courses are less expensive. It’s also a great choice for someone who isn’t keen on moving far away from home or is an independent studier. One caveat: before enrolling in any online course, check that the program offered is accredited and verify it with an agency so you know you’re son or daughter won’t end up with a worthless degree!
Also, the specific programme your son or daughter enrols in, and the experience he or she gains will have a much greater weight in terms of their career opportunities than the actual name of the university.
Remember that not all successful people went to Ivy League schools and not all Ivy Leaguers were successful.