Save the hongbao for your children's education

SINGAPORE - January this year is a special month for the Chinese as we mark the arrival of Chinese New Year, but it is also particularly significant for many of my girlfriends who are mothers. After having their babies to themselves for more than two years, many of them sent their toddlers off to school, or pre-nursery, with teary goodbyes and conflicting emotions earlier this month.

One of them asked if I had registered my 18-month-old son for pre-school next year, the year he turns three. Honestly, I hadn't thought about it (it's only January and I have been more preoccupied getting ready for CNY), but she warned me to register him soon "because he's a dragon year baby".

The conversations with them prompted me to think about the financial costs involved in education - something I frankly haven't given too much thought about.

As I began to do my research, I realised that the process of finding the right pre-school for your child can be a minefield as there is such a variety of options - and costs - involved.

You can choose for your child to go to government-linked or church kindergartens, which have lower fees than private childcare centres - usually a few hundred a month for a half-day curriculum. Or for private childcare, the average cost of a full-day programme is $923 a month and $691 a month for a half-day one as at last December, according to the Early Childhood Development Agency. The Government provides a standard subsidy of $300 for the former and $150 for the latter.

Thankfully, the cost of education does go down when your child enters primary school at age seven. For Singapore citizens, the fees are about $10 a month at public primary schools.

Secondary school fees are slightly higher - about $25 a month, although independent schools can charge $200 to $300 - and at junior colleges fees increase again slightly.

(Unless of course you are sending your child to international schools, then you need an entire separate strategy for that as they charge a few thousand dollars a month.)

Up until university age, I would consider education costs for children in Singapore to be manageable, considering the fees for the bulk of school-going years (primary to pre-university) are heavily subsidised by the state, and there are government schemes that help families in need pay for their children to go to school.

I'm not including costs for extra tuition, as I believe that what students need to learn is sufficiently provided by teachers and the school. I never had any tuition growing up and cannot quite understand the obsession many parents here have with endless tuition and enrichment classes. Anyway, that is another story.

But on the costs front, tertiary education is a different matter. Unlike the other stages of schooling, it requires a hefty investment and requires a combination of planning, saving and investing on the part of parents if they want to support their children through university.

Ms Joyce Lim, head of investment research and advisory at Citibank Singapore, notes that tuition fees at Singapore universities currently range from $30,000 to $93,000 for a four-year programme. For a Singaporean taking a similar course in Britain or the United States, fees can range from $150,000 to $200,000 and in Australia between S$70,000 and S$150,000.

Factoring in inflation, the cost of such fees will only rise in the years to come, along with the associated living, accommodation and travel expenses.

Ms Lim sets out a strategy that can help young parents do so. It starts with goal setting - first, determining the amount that would be required by factoring the effects of inflation. Research the fees required for the university you have in mind for your child, and factor in inflation rates - for example, 1.6 per cent per year, which is the average annualised increase for most courses in Singapore. Then, review your current financial situation and calculate the gap between what you need and what you have.

Some options to help achieve this goal include: pure savings, purchasing an education policy, investing the money or a combination of these, she adds.

I think a combination of the three options would be the most effective. I opened a savings account for my son when he was born, but have not been diligent in putting away money for him. The only financial planning I've done so far for my son's education was buying an endowment policy from NTUC Income last year, which came recommended by one of my insurance agents.

The policy, called "Pay My Uni" (which has since been replaced by another offering), requires me to pay about $2,400 yearly for 20 years. By the time it matures (around the time my son goes to university), it will pay out about $67,000 at the lower range of the projected return of 3.75 per cent, or about $80,000 at the higher range of 5.25 per cent.

In my opinion, it's not a super attractive, but decent policy - given that it probably will match or just beat inflation rates over the 20-year period - but I bought it nonetheless since it forced me to save an additional fixed amount per year towards my son's education and is a relatively safe investment, with the benefit of some life insurance coverage for him added.

As for investing our money, my husband and I do that regularly even though we have not allocated any of that specifically for education.

As to exactly how much we would need to save for that purpose, we had a discussion about it given our different backgrounds. His parents had cut off all financial support to him when he reached 18.

To go to university he had to take out a student loan to pay for tuition and living expenses - so he graduated with a sizeable debt and took years to pay it off after he joined the workforce.

On the other hand, Asian families typically provide financial support to their children. I had friends whose parents downgraded or remortgaged their homes just so they could have an overseas education. I was fortunate in that I was awarded a scholarship that paid my overseas university fees, but I know my parents would have supported me to get a local degree anyway.

We both decided that we would set aside a fixed sum for him to attend university - somewhere in between the cost of a local and overseas university - and re-evaluate the amount on a regular basis.

Deciding how much funds you'd like to provide for your child is the starting point for planning how much you need to save over the next two decades. More importantly, there has to be some discipline involved in committing to the strategy and regular reviews to ensure you're on track given changing financial situations.

As for me, I think the upcoming CNY is the opportune time for us to seriously execute our strategy - starting with saving those hongbao given to our son and putting them in his bank account. Given that we will welcome a second child this March - and the amount of money that we have to set aside will double - starting early is clearly not a bad thing.

Here's wishing all readers a Happy Chinese New Year!

stinvest@sph.com.sg

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