How to build an Education Fund for your unborn children
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 have-nots. 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 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 your financial plan from now because raising kids can be quite expensive.
Secondary school tuition is a neck breaker. Some schools’ tuition fees are between ₦1m and ₦1.5m per annum for a child. This means for three kids in secondary school that’s about ₦3m to ₦4.5m per annum. Wow! University tuition fees too are not a walk in the park either. Some private universities charge between ₦800,000 and ₦1.2 million per annum. And for those looking overseas, tuition fees abroad as an international student range between ₦6 million and ₦18 million 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 education costs are if you plan to pay fees directly from your pocket without building an Education Fund. No wonder most people are only having two kids these days. It’s more economical. 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 three to six 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 will focus more on setting up an Education Fund for your child’s university education. Nevertheless, what will 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 will be the time to accumulate will be shorter [typically 10 to 12 years] and won’t enjoy the compounding effect long enough as compared to preparing for university education [typically 16 to 18 years].
Also, the amount to contribute will 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 investor’s 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:
- How old is your daughter?
- At what age is she likely to start her university education?
- Is her university education in Nigeria or overseas?
- How much does it cost today?
- Do you think you can afford it? Do you expect an increase in your future earnings? Are you willing to commit and stick to a plan without touching the funds?
And Afolasade says:
- 2 years old
- 16 years old
- Overseas, the US
- $100k [4 years of tuition + etc]
- Yes, I can. I’m also working very hard to grow my income. I won’t touch the funds.
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 build 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 $25,000 per annum and in 16 years it could have risen to $40,000 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 ₦360,000 [assuming $1: ₦360]. If the naira falls to $1: ₦400, she needs to be contributing ₦400,000 per month, an extra ₦40,000.
Afolasade’s Investment Plan:
Since her daughter is two years old and would start her university education at the age of 16, it means Afolasade has a 14-year period to build her daughter’s Education Fund. Afolasade would need to be investing a minimum of $600 monthly at 7 per cent per annum for the next 14 years, which would give her c.$168,000; but after adjusting for average inflation rate of 3.5 per cent [in USD] over the 14-year period, Afolasade would still have c.$104k, $4,000 above her target of $100,000 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 following:
- No child
- 16 years old
- Nigeria, Private University
- ₦6m [4years tuition + etc]
- Yes, I can. I’m ready to be more prudent and grow my income
Fabian’s Investment Plan:
Since Fabian doesn’t have a child yet, we can estimate he has at least a 16-year 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 cent per annum for the next 16 years, which would give him ₦32.8 million; but after adjusting for average inflation rate of 11 per cent [in Naira] over the 16-year period, Fabian would still have ₦6.1 million [₦100,000 above his target of ₦6 million] 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!
Now, I must confess that the above investment plans are very simplistic and straightforward in nature and were 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 have-nots. In this era of globalisation, 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?
*Damilola Alonge is a Fixed Income Portfolio Manager based in Lagos, Nigeria