It’s your child that you decided to have entirely as your choice. As they grow they give you a sense of responsibility and one of the foremost is education. You enrol them in Montessori, then in primary and then in secondary. Their education doesn’t become much of a financial burden until they go to college or university. In a country like Pakistan, the dynamics that come into play are totally different than most parts of the world. Most people start thinking about their children’s education after they enter secondary school, which is the old school thinking. By that time either you don’t have enough to pay for private institutions or if you have enough you need to cut down on personal expenditure to pull enough money to pay for any extra that may be needed.
So what can be done to change this?
Is saving an option?
I would never recommend saving for a child. Traditionally banks have always offered returns on savings. The returns have been from 3% – 8% on savings with some banks allowing withdrawals on the saved money. With fixed deposits and demand deposits also available, the option of saving becomes varied actually allowing you to save for your child and ‘forgetting’ about the money you put into these schemes. Factually, you could put money into a fixed deposit have it multiply over the years and have a handsome amount at the end of the term which can be as long as 20 years. The downside, money you put in the deposit is tied in for as long as you put it in. The only problem with saving is that it is ‘saved’ and ‘unavailable’ for any other use to you.
What if you could use it to fund some other expenses but still grow it?
Opening a fund or investing it in real estate or even the stock market for long term gets you the benefit of using your money to derive dual benefits. Here is how you can do it.
- Open a fund with objective of your child’s education in mind. Put that money in a separate bank account. It is a fund in your books only; you don’t have to register it with any entity.
- Take that money and make intelligent investments in secure stocks or mutual funds for the long term and monitor it. Buy when the market is low and sell when you see a profit.
- Let the profit accrue to the same fund account. If you feel you need those profits for some current expense open a separate account for it to keep track. Keep adding to the fund account on a regular basis; monthly, quarterly. Calculate the expected amount you will require and work towards it.
For example, in the year 2000 the average semester fee for Bachelors in a private institution in Pakistan was Rs. 30,000 and in the year 2010 the same was roughly Rs. 45,000. If a parent was to make a fund for their child who would be studying in 2010, they would be starting in 1997 assuming that the child is entering college in his 18th year. That means at least 13 years earlier.
His total college fee would be Rs. 360,000 for the year 2010. Dividing it over 13 years gives Rs. 27,692 per year. This would be the least that they would need to generate every year. Anything more than this is a bonus and can be used for personal expenses. Considering stocks and mutual funds can render long term returns of 8%-10%, investing or reinvesting the gains will easily help them reach the goal. Considering inflation of at least 5% each year, it may be a good idea to add 2% to the yearly goal. This would bring it down to Rs. 28, 246. This would cover any unforeseen expenses.
Of course this is a very simple example.
If you have more than one child the calculations get complex and if there are more expenses involved the target value is larger and the investments become more diverse. As you make diverse investments the average rate of annual return comes into play which is essentially the total return you are getting divided by the number of investments you have made.
So what do you want to do?
Open a fund or save money and block it?
It’s your decision in the end. But it’s always a good idea to explore all your options in depth even if you don’t like the idea of them. You may discover something that you begin to like and may suit your lifestyle better.