Concept Advisory Services

• How To Fund Your Child’s Education

  Posted: May 9, 2008, 7:55 pm by admin

  (As interviewed by the standard Newspaper dated 5^th May , 2008)

  My name is Douglas Mutiso and i am 38 years old with a family of three children. I work with a local manufacturing company in a managerial position where i take home a net salary of Ksh 90,000. I also earn Ksh 20,000 from two servant quarters i took a loan to construct. I do not pay for rent since I live in my own house, but am repaying the loan at Ksh 35,000 a month. I also pay Ksh 10,000 a month to my personal pension scheme. My employer doesnt provide this. My eight year daughter was recently detected with asthma, and i spend approximatley Ksh 7,000 for her medication a month. I also pay school fees amounting to Ksh 25,000 a month for my children in classes one, three and five. My wife takes care of the other home expenses from her salary as a secretary, but i chip in about Ksh 10,000 a month.

  I would like to take up an educational fund for my children too and secure my family’s future. How do i achieve that and still be comfortable with my other responsibilities.”

  Mr. Mutiso, the key to funding your child education is to start planning and saving now, no matter what your child’s age. It is a good thing that you have already identified this major financial goal and you are willing to develop a plan to achieve it.

  There are various ways that you can meet this goal. A good place to start would be for you to come up with a spending plan that will help you identify areas that you can cut on spending or seek alternative means that will save you money. For example, instead of paying k’sh 84,000 towards your daughter’s medical bill from the pocket, I would recommend taking a medical cover for the same amount in premiums but with a limit more than 10 times the amount. This will afford you cover for all the members of your family and would come in handy if an emergency arose.

  Mr. Mutiso, in your break down of expenses you have not mentioned whether you have an emergency fund. An emergency fund cushions you against a financial calamity. This may include loss of job, illness, or making a major purchase. With an emergency fund, you can access your money in a short notice. Generally, it is recommended for an individual to put 15% of one’s income after tax in such a fund. The best place to have an emergency fund is a high yielding savings account without many restrictions on withdrawal. Your personal pension fund may not meet your emergency obligations due to the restrictive laws governing such schemes. When the funds grows to a certain amount, say a year’s saving, you can invest this money directly in the stock market or engage the services of fund mangers who operate unit trust schemes.

  Having put k’sh 16,500 (15% of k’sh 110,000) in an emergency fund you’re left with k’sh 6,500. This is the amount you need to work with in setting an education fund.

  Various options exist in setting an education fund. You can open a children savings account with any of the banks. Normally, the account is in the child’s name but the parent operates the account. The interest is usually higher than your average savings account. Greatest advantage is you can pull out anytime and there are no penalties. The only charge is for closing the account.

  But with such an account, you may not fully realize a good return on your money. Savings accounts provide minimal return and will not protect you from inflation. Ultimately by the time your child is of school going age and you want to liquidate your savings, the savings may not cover the cost fully. Again, a savings account may not require your disciplined effort to save. It’s possible then to lack motivation and hence find yourself no longer being motivated to carry on this noble goal.

  My advice would be for you to consider taking a unit linked education policy with any of the insurance companies. With a unit linked policy, a larger part of your savings is invested, say in the stock market and the remaining option affords you an insurance cover. Thus, as an investor you are guaranteed better than average returns in the long term. The returns in the long term can be higher than the rate of inflation in a similar period hence preserving the value of your money. And with the mandatory life cover, you can sleep well knowing that even if you are not there the family will be provided for.

  A unit-linked policy affords you monthly contributions, with a low of k’sh 3,000 and an option to vary your contributions upwards or downwards depending on current circumstances. Upon inception, the requirement is to put a direct debit in force. With this arrangement, the amount of premium is debited from your account and remitted to the insurance company on the time you have specified. It’s advisable to put the direct debit falling close to the date you receive your salary. This would remove the temptation to withdrawal the funds before paying the premium as the bank will already have remitted the cash. A unit-linked policy is a long term savings machinery with a minimum period of ten years. This would require a disciplined effort on your part. It will also call for a sacrifice on your current consumption where you will do away with non-essential purchases.

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