Education Planning- Children and the ‘Gimme Years
Unless you’re absolutely loaded or enjoy an income to rival Madonna’s, saving has to be a key part of your financial planning. Let’s assume that regular cash flow from earned income takes care of the day-to-day expense of running a home, family, car and everyday bills, leaving enough of a surplus to cover the annual visit to the sun and the odd weekend break. The question you have to ask yourselves is will there be enough left over to cater for those peak spending periods? There are essentially two critical periods in the average family’s life when the spending graph peaks way above normal spending patterns. Retirement is arguably the first of these that ought to be considered and planned for by way of a pension, either through an occupational or personal pension plan. The other period when there is an inordinate tug on the family’s purse strings can be labelled ‘the gimme years’ – that period when the kids are at their most costly and preparing for college.
If we work on the basis that Irish couples are today typically marrying in their early 30s, they are then going to reach this stage in their late 40s. At most this leaves perhaps 15 years of a lead in time for building up funds to cater for the cash call that is looming. Accordingly, it is very important that parents start saving for their children’s education as soon as possible, even as early as the day the child is born. Time is one of your most valuable assets. The sooner you start saving for school/college, the more time your money will have to grow. You might say to yourself ‘so what’s the big fuss?’ Education is largely free in this country. While that’s true, you don’t know for sure that you might not wish to send the kids to an expensive private school. Once at college there is the cost of accommodation away from home, which is especially pertinent for rural dwellers and the inevitable demand that young Mary or Sean will make to move in with their mates after a couple of years. And who knows, your pride and joy might turn out to be a genius, requiring further specialised education. You can, of course, always take a chance that you’ll have sufficient resources to meet those cash calls down the road. It’s risky because the last thing you want is to be forced into a corner and have to top up your mortgage by say €25k. If you start saving early enough, even a modest weekly or monthly investment can grow to a significant college fund by the time the child matriculates.
So where do you start? Regular saving in a deposit account is simple and risk-averse but capital accumulation will be slow and may not prove sufficient in the long term. Better still opt for a tailored saving plan offered by a life insurance company, one that gives you managed exposure to the five key asset classes – equities, bonds, property, cash and currencies. Each company will have a wide choice of different funds and you can decide with your broker which one to choose.
There are unit-linked products. The funds are divided into ‘units’, which you buy, and the value of each unit depends directly on the underlying performance of the investment fund. The daily unit price is based on the market value of the underlying assets. The advantage of unit-linked plans is that they are simple, clear, and easy to understand. You will typically commit to save for at least six years with the option of saving for at least 20 years. Most of these products are sold without life assurance but this is an optional extra should you wish to buy cover.
The SSIA scheme set the saving habit, with the average monthly amount saved per person working out at just over €165. This might not be a bad rule of thumb when you’re starting out although how much you are able to save will be determined by your disposable income.
Investing directly in the stock market is not really advisable when savings for a specific event or events, such as education or retirement. The lack of certain return is the critical issue.
If this is something that is of interest or concern to you we’d be happy to discuss your options. We can talk you through the best steps for you while ensuring that you have a chance to consider the pros and cons of each option open to you.