Plan ahead for your child's education

SINGAPORE - It is every parent's dream to see their children succeed in life, and to provide their young with a good education.

With the increasing cost of education, planning early will minimise the chance of your child being deprived of a good education.

The good thing is that education is a goal where the time horizon is a known factor, and parents will be able to accurately estimate how much time they have to achieve their targets. Experts recommend starting as early as possible, to give parents the maximum amount of time to reach their goals.

The first step is to identify how much money is needed to send your children to school, or to university. It is important to budget for other essentials such as accommodation and transport.

To help customers with their research, HSBC has put together a set of country guides on its website providing handy information on the cost of living, tuition fees and other practical information. Countries covered include Singapore, Australia, the UK and the US.

Next, take stock of how much funds you have already set aside for this goal and work out the shortfall.

With more time to reach the target amount, customers can afford to invest in instruments that provide a lower rate of return, which are usually less risky.

Mr Deepak Khanna, head of wealth development at HSBC Singapore, noted: "One cannot ignore the importance of investing regularly, and early, to reduce the level of risk you need to take."

He added that for parents who are starting early, using an age-based asset allocation strategy is one of the best approaches.

An age-based asset allocation strategy starts off with an aggressive mix of investments, and gradually shifts the asset allocation to a more conservative mix as college approaches, explained Mr Khanna.

For example, one strategy is to be invested completely in equities when the child is a baby, and slowly reducing the proportion of money invested in stocks by 20 per cent in set intervals, for example, when the child turns eight, 12 and 16.

Parents of a toddler might suffer big losses on a percentage basis, but the dollar amount of those losses is smaller since they haven't been saving for as long.

In addition, the parents of a toddler still have many years ahead to recover from the losses, he said.

By the time the child is ready to enrol in college, Mr Khanna advised that no more than 20 per cent of the college funds should be invested in stocks.

He said that the rest of the money should be invested in relatively conservative instruments that will preserve the college savings even if the stock market plunges.

Common mistakes that parents make include procrastination, taking too much or too little risk, and not diversifying their investments.

Mr Khanna explained: "An early start can make a world of difference in the potential returns, as a longer time horizon will allow compounding interest to work effectively."

He added that investors who are high-risk takers often end up as speculators and make investments without conducting prior research, while investors who are too conservative may bear the risk of inflation eating into their capital.

Investments aside, allocating a sum of emergency funds will be extremely vital for any investor, in the event of a personal economic upheaval.

Mr Khanna said: "Before venturing out to the markets, investors are advised to set aside liquid funds amounting to at least three to six months of expenses to take care of financial emergencies, such as unemployment, or unexpected cash flow problems."

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