Like retirement planning, your time horizon and the age of your child will play an important part in choosing the right education funding options for your child. Our financial planners can guide you through a step-by-step approach in analyzing the various investment alternatives and strategies that will suit your needs. Moreover, our interactive college planning tools will allow you to get a fairly good idea about the likely education cost per child and an archive of related articles on this subject is also available on our web site.
Few people question the value of a college education, but the cost of overseas private education is enough to break the bank for a lot of families. With the cost of higher education rising faster than inflation, parents of today's four-year-olds may face college bills of several million Baht. The most recent numbers on cost increases are certainly daunting enough. Costs of higher education in the US and UK will most likely continue to increase at an average annual rate of roughly 5%. This means that to keep up with tuition inflation, it's essential that one must invest aggressively when children are still young.
To many people, saving for college is like an endless pursuit. When one is trying to build a retirement nest egg while taking care of young children with all kinds of needs, it can seem as if there is no hope of raising any more money. Here are a few tips to get you started:
The sooner you start saving, the better. Even modest savings can multiply quickly if you give them time to grow. Investing just Baht 10,000 a month for 18 years can yield Baht 4.8 million, assuming an 8% average annual return.
Put Your Retirement first
This may seem like a selfish attitude, but your children will have more sources of money for college than you will have for retirement.
Stocks are Best for College Savings Portfolio
With tuition costs rising faster than inflation, a portfolio tilted toward stocks is the best way to build enough savings in the long run. As your child approaches college age, you can shelter your returns by switching more money into bonds and cash.
Keep it simple
Investing in mutual funds puts a professional in charge of your savings. Stick to funds that have solid three-to-five year track records and low expenses. You can make use of automatic monthly withdrawals from your bank account to force you to save.
Don't Overlook Financial Aid
Student loans and grants can bridge the gap between your savings and tuition bills.
What's the best way to invest?
The first rule of thumb is make sure your investments grow with your children. Most investment planners recommend that you base your asset allocation on your child's age. The main strategy is to take more risk in the early years, when you've got enough time to make up for the inevitable short-term market fluctuations. Then, as your child grows and near college age, gradually scale back your risk exposure- to protect your principal without unduly sacrificing returns.
0-4 Age Group
(80% High-Volatility; 20% Medium-Volatility)
As any new parents will tell you, scraping up money for tuition savings is tough. When you are trying to deal with the cost of raising a small child, both expected and not, the last thing you want to think about is a college bill 15 years off in the distance.
That's why whatever savings you can cobble together, should be invested at least 80% in high-volatility mutual funds which are appropriate for long-term investors who don't need to cash in their accounts for many years. The remaining 20% can go into medium-volatility funds, which are best suited for a five-to-ten year investment horizon. Although, at first this strategy may seem risky but this is the time to do it. Any dips in the stock market, and there are bound to be several over the next decade, will almost certainly be made up for by the long term growth of your portfolio.
5-8 Age Group
(75% High-Volatility; 25% Medium-Volatility)
If you have already started saving before your child reaches age six and you've chosen an aggressive mix of investments, then there's no reason to shift any of your portfolio. The Age 0-4 strategy works just as well for the next few years. But for those starting their investment programmes now, they don't have quite as much time to make up for market downturns. That is why it is recommended that only 75% of the college savings should go into high-volatility funds and the other 25% in medium-volatility funds.
The medium-volatility group of funds are often known as a “value” style of investing, whereby they tend to have consistent returns through all types of markets while still achieving above-average returns.
9-13 Age Group
(25% High-Volatility; 50% Medium-Volatility and 25% Low-Volatility)
These are the awakening years. Graduation from grade school and other activities are all too constant reminders that your children are growing up. If you haven't saved until now, this is the time you will start worrying. However, you still have time to put together a solid portfolio that will go a long way toward paying for college. Invested intelligently, even Baht 20,000 a month will grow to almost Baht 3 million eight years from now.
This is the time to carefully assess your investment strategy. Whether you are just starting to invest or you've been saving all along, this can be a tricky time. With five to nine years to go until college, you've got enough time to capitalize on the effects of compounding. Nevertheless, school is not so far off that you can afford to risk actually losing money.
For now, you will want to keep 25% of your assets in top-returning high-volatility funds to make the most of the years you have left. Then you will need to shift a total of 50% of your portfolio to the medium-volatility funds. Finally, for the safety that comes from extra diversification, you will want to move 25% of your savings to low-volatility funds.
14-16 Age Group
(25% Medium-Volatility; 25% Low-Volatility; 50% Government Bonds)
With only a few years until that first tuition bill, preserving your hard earned cash is the key. But on the other hand, you still want to get as much growth as you can. That's why at this stage, you should keep 25% of your portfolio in medium and low volatility funds. But it's also time to move 50% of your assets into government bonds.
The best time to move this money is during your child's last year in high school. The goal is to set aside enough interest income to cover the first two years' worth of tuition payments. By buying bonds with three to four year maturities, your principal will be protected but the return will be high than short term fixed income funds. Meanwhile, the rest of your portfolio can take advantage of the four to six years you have before the later tuition bills come due.
17-22 Age Group
(80% Government Bonds; 20% Low-volatility)
The pressure to save for college does not stop the day your child goes off to university. There are still at least three more years ahead to pay for, and you will need an investment strategy that will maximize your returns without sacrificing the safety of your savings.
Thus, you will want to move almost all of your mutual fund assets to Government bonds that will mature in the last two years your child will be in college. But because you still have several years to go until your child graduates, it is suggested that you keep 20% of your portfolio in low-volatility funds to increase your chances of getting some last minute returns. That can make all the difference as college costs continue to increase.