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Image credit: @artbytes via Bitlanders
Last week, I enrolled my eldest son in Kindergarten-1. He is about to turn four in three months. I enrolled him in St. Mary's - a school run by the RVM sisters, which is my Alma Mater.
The tuition fee for Kindergarten 1 is more than PHP 20,000.00. This got me thinking again if how much do we need for his college education when the time comes.
My son, having fun in the school ground after I enrolled him.
Image Credit: @arbytes via Bitlanders
Fortunately, a month ago we were given another seminar on personal finance. In that seminar, I learned how to compute for a child's education by the time they reach college. The computation is not exact, but at least we will get a close estimate.
In this post, I will share with you how to compute the amount you need by the time your child enrolls in college and until he or she graduates. (Assuming your child doesn't extend his or her college years.)
Just like in my post 'Do You know How Much Do You Need When You Retire?', we will use, once again the Financial Calculator.
The Financial Calculator
This post will be divided into two parts.
Part I. How much do you need when your child reaches college? For the first part, we will compute for the probable tuition fee rates of colleges and universities by the time your child reaches college.
- Know the current tuition fee rates of the top colleges/universities in your country. Or at least the rates of the colleges or universities where you might send your child for their college education
- Compute for the total amount you need to spend for your child's college education from the first year up to graduation.
Part II. How To Prepare For Your Child's College Education. In this part, we will compute how do we need to save for your child's college education
- How much do you need to save a month/
- Where will you put your money so it will grow enough to cover your child's college education?
I. How Much Do You Need When Your Child Reaches College?
In this part, we will determine how much you will need when your child reaches college. I will provide an example below to make it clear.
"Tuition Fees Increase almost every year!"
Video Credit: Tudla Productions Via YouTube
In the Philippines, this is one of the scenes that happens almost every opening of the school year. student organizations take to the streets their protest against tuition fee increases. Most of the time they blame the government for allowing the colleges and universities to increase their tuition fees. These students, however, seems to ignore the fact that in order for these institutions to keep running, they have to spend money every month. Some of those expenses are:
- Salaries for teaching and non-teaching staff
- Utility Bills
And because of inflation, the costs of these increases every year.
Effects of Inflation
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of the currency is falling. Central banks attempt to limit inflation and avoid deflation, in order to keep the economy running smoothly.
Inflation is inevitable. Therefore the expenditures for the items listed above increases every year as well. In the Philippines, the projected annual inflation rate for the next 20 years is 3.5 percent per year.
Simply put, because of inflation, prices of goods and services goes up every year. Therefore, utility bills will go up. Maintenance costs go up. The salaries of the teachers and staff should be increased as well or else they will be forced to leave the institution for better-paying jobs.
To put more bluntly, tuition fees will increase every year whether you like it or not.
According to a report by Rappler in May of 2017, the average tuition fee increase in Higher Education Institution is 6.96%.
Tuition Fees of the top colleges /universities in the Philippines as of December 2017.
Image Credit: www.finduniversity.ph
These are the tuition fees of some of the top colleges and universities in the Philippines as of 2017.
Now we will use the Financial calculator to compute for the projected tuition fee by the time your child reaches college.
Before we do that, however, we need the following information
- Current tuition fee rate of the college and the specific course
- The current age of the child
- The number of years from now until the child reaches college
- Average annual tuition fee increase
Just to show an example we will assume that the data above are current. I will select one of the schools above. In using the Financial Calculator, we will use the following data
- Annual Tuition Fee (current): PHP 90,000.00
- Current Age of the Child: 4
- Years to College: 14
- No of years enrolled: 4
- Inflation Rate: percent
College Savings Calculator
We will use the College Savings Calculator under Retirement /401K.
You will find the 'College Savings Calculator' at the bottom of 'Retirement Calculator List'
Image credit @artbytes via Bitlanders
For now, I will leave the rate of return blank. I want to focus on the amount of tuition fee after 14 years and the total cost of sending your child to college. Enter the information above and then tap the 'CALCULATE' button.
The College Savings Calculator using the information above.
Image credit @artbytes via Bitlanders
The tuition fee worth 90,000 Pesos will be worth 178,193.84 after 14 years assuming 5% annual inflation rate.
Image credit @artbytes via bitlanders
As you can see, after 14 years, the PHP 90,000 tuition fee will balloon to PHP 178,193.84. That's just one year of tuition fee. This does not even include the other expenses. And every year, if the tuition fee increases by 5%, the tuition fee on your child's 4th year in college are now PHP 206.281.65! And the total projected cost is a whopping PHP 768,037.74!
Perhaps a conversation with your son would go this way...
"Son, I can't afford to send you to a good university. You study hard in your grade school and secondary school and hope that you can get a scholarship for your college or a state university."
Not a bad option actually. However, what if he replies,
"But Dad, I want to be a good doctor like Grand Dad. You said he was one of the most sought surgeons in the city. I want to study where he studied!" -*
You don't want to say,
"Sorry, son. We can't afford it. I regret that I haven't prepared for your college education. I should have listened to that Financial Advisor. I thought he was just trying to sell me a policy so he could get a commission.
Indeed he gets a commission, but I realize now that it was worth less than he deserves for helping me.
Go for the scholarship son."
Well again, not a bad way to build up your child's self-confidence. But do you want to put the pressure on your child? Why not keep your options open?
How? To answer that, let's go the second part of this post.
II. How to Prepare for your Child's College Education
We have already determined how much do you need. The next thing to do is find out how you can prepare for your child's college education.
How Much Do We Need To Save Every Month?
If you take a look at the table, there is a column named "DEPOSIT". Under it is value 42,668.76. What does that number mean? That's the amount you need to save every year. Divide that by 12, you get 3,555.73 a month.
Could be affordable, right? But guess what, we can make that number smaller.
Remember earlier we left the Rate of Return blank. This means you did not put your money in an institution where it could grow. Even a bank could give one to three percent interest per year.
Now let's say you listened to your Financial Advisor. He showed to you the historical performance of one of the types of funds where you could invest your money has grown more than 300% since it started 13 years ago. This means that those who invested their money 13 years ago, now have tripled their money. This is called passive income
Passive income is earnings derived from a rental property, limited partnership or another enterprise in which a person is not actively involved.
However, he explains, he can't guarantee you that 20% rate of return annually. Performance is often affected by other factors every year, so it goes up and down. But you could expect an average return of 8% -** per year.
So for our calculations, we now use 8% as the rate of return.
Calculating for the annual contribution with 8% rate of return
Image credit @artbytes via Bitlanders
The table showing how your money can grow with 8% rate of return per year.
Image credit: @artbytes via Bitlanders
As you can see the Annual Contribution has dropped to PHP 22,994.98. Again, divide that by 12, you need to save:
PHP 1,916.25 a month only or PHP 63.88 a day only!
Where Will You Invest Your Money That Will Earn 8% Per Year?
A little caution on where you should invest your money. If someone offers you a guaranteed rate of return of 10% or 20% or higher, TURN BACK! Real investments are risky, takes time and the growth rate is unpredictable. There are a lot of so-called "companies" who offers a hundred percent guaranteed return in less than a year. As I have mentioned before, my rule of the thumb is:
"If the investment is earning too big and too fast, then it's too good to be true"
Before, you invest your money here are some precautions:
Ask the person who is trying to convince you, 'Are you SEC-registered?' (a Philippine government body where corporations could get a license to operate in the country). If they don't have, then they are operating illegally in your country. Be forewarned, some of them will give you convincing reasons why they don't need to register to SEC.
Also, ask "How does your money grow?"
If it's a multi-level company, will you earn from selling or mostly from recruitment? If it's more on the latter, it's a Pyramiding Scheme. Again, pyramiding scheme is illegal.
Legal Investment Vehicles
Here are some of the legal investment vehicles.
- Stock Market
- Mutual Fund
- UITF (your bank offers this)
- Real Estate (buy and sell or rental)
- Forex Trading (Very high risk)
- VUL - Variable Unit Linked Insurance
My favorite investment vehicle and what I will recommend is VUL. VUL is an insurance product that comes with investments. The fund managers of an insurance company will invest your money in a fund of your choice:
- Money Market Fund
- Fixed Income Fund
- Growth Fund
These are just some of the type of funds where your money will be invested. Investing in Equity is like investing in the stock market. The difference and advantage are, investing through an insurance company mean you have highly skilled fund managers managing your investments. You don't have to monitor your investments every day like in the stock market.
Since it is an insurance policy, the income generated is tax-free, plus if something happens to you (heaven forbid) your beneficiaries will get the amount without hassle.
That being said, in order to prepare for your child's college education, look for a financial advisor. Look for a legal and reliable insurance company in your country that offers VUL products.
What if you can't save the needed amount?
Even if you can't afford to save the amount that came up in your computation. Don't get discouraged. Try to save at least half of that amount at first. Sooner or later you will find a way to increase your income and at the same time decrease your expenses.
The important thing is, you start saving now!
To Wrap This Up
Yes, you can send your child or children to the best school when the time comes. The earlier you start the less you need to save every month. Invest your money wisely in a legal institution like an insurance company.
The most important thing is:
START AS EARLY AS YOU CAN!
Even if you are still single, start planning for your future now. If you are still in your twenties it's the best time to start investing.
Before I leave, you might be interested in playing with the Financial Calculator. Here's a short video showing how to use the College Savings Calculator.
In this video, I showed you the difference if you start 4 years earlier, or your child is still in infancy.
Video Credit: @artbytes via Bitlanders
*- My late father was a doctor and modesty side, he was one of the most sought-after surgeons in our city.
**- Investments rate of return is never guaranteed. However, insurance commission dictates that Financial Advisors show a table using the 4%, 8% and 10% rate of return.
Thanks for reading.
- 5 Things I Wish I Did in my 20s
- How to Improve Your Financial Literacy
- Are You Saving For Your Future? Part 1: The Rat Race
- Are You Saving For Your Future? Part 2: How To Start a Savings Habit
- Are Saving For Your Future: Part 3: Save For Your Future
- Do You Know How Much You Will Need When You Retire?
I Am Here to Help
As a Financial Advisor, I am here to help. Though my knowledge and training are limited to Philippine settings, I still might be able to share a tip or two. So, I would appreciate it if you ask questions through the comment section below.
John Reynold Loberiza (a.k.a @artbytes) is a freelance graphic artist, web developer, and blogger. He is also a licensed Financial Adviser under Insular Life.
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