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August 25th, 2014

Investing for University Education

 

As a parent, guardian or caregiver, one of the greatest gifts you can give your child, grandchild or young relative is help towards a secure future.  One way in which you can do this is by providing a sound education.  But the cost of a quality education can be hefty and usually cannot be easily absorbed into a monthly or yearly budget. For this reason, you will need to plan very carefully for your children’s education.

Tertiary level studies are usually quite costly – with the cost varying depending on the field of study and the ratings of the particular university or college.

Furthermore, you may opt to send your child to a foreign university as the field of study may not be offered by our local and regional universities.  Then it becomes even more daunting when parents add tuition fees, accommodation and living expenses. Many parents are simply not preparedfor such a financially draining situation. Some parents aren’t even aware of its impact until it’s too late – when their children have only a few years left until graduation from secondary school.  The options open to the parent for the funding of tertiary education range from borrowing the funds when your child is ready to go to school, paying for their schooling out of your present cash-flows, or begin saving and investing to create an education fund for each child.

At present, tertiary level studies are either wholly or partially funded through the Government Assistance for Tuition Expenses (GATE) programme and this initiative provides one avenue for funding your child’s educational aspirations – but it will only meet a fraction of the costs.  Today it costs between TT$50, 000 – TT$60, 000 for an academic year at UWI and with inflation, that figure is only expected to rise going forward.

As such, it is strongly recommended that you start preparing for your child’s university education as soon as possible.  You can start by setting aside a portion of your income into an investment account.  A small contribution on a monthly or yearly basis can go a long way in covering education costs, which are rising fast.Some familiesstruggle with saving for both their retirement and their children’s university education and sometimes sacrifice one for the other. Thus, to ensure you have the funds available to fund your child’s education, you must start early and invest regularly to have any hope of achieving this important financial goal.Mindful of this challenge, the UTC has engineered the Children’s Investment Starter Plan (CISP) andStudent Investment and Protection Plan (SIPP). Both plans being geared towards meeting your child’s education and allow you time to build your education fundat a comfortable pace.

Before you invest, however, there are certain factors you must consider.  Firstly, you have to determine how much the education programme will cost.  The overall cost will be influenced by various factors including whether your child will be studying at home or abroad, what programme will be pursued, for example, medicine, business, information technology, the number of years to complete the programme, whether it is a public or government-assisted or private school, are there any scholarships or financial aid available, just to name a few.

Once you have determined how much it will cost, it is recommended that the overall cost be broken down into a manageable number by calculating how much you will need to contribute to your investment per year or per month until your child starts school.Depending on the age of your child, you will need to consider the average rate of inflation in order to ensure you meet this financial objective.

Secondly, it is important that you have a diversified portfolio of investments and this is premised on the age-old mantra, ‘don’t put all your eggs in one basket’.  You can select from a range of investments to include in your portfolio, including equities and bonds and even real estate. The inclusion of a variety of investments into your portfolio aids in lowering your portfolio‘s overall risk, as the different asset classes respond differently to the market.  Ideally, if one particular asset class is underperforming or incurring losses, another asset class should be posting gains, thus netting off or reducing the size of the losses. 

There is also the option of investing in a collective investment vehicle such as mutual funds.  Participating in mutual funds provides several advantages, including having a dedicated fund manager who has the necessary knowledge and skill in monitoring the economic environment and market and making the appropriate buy and sell decisions on your behalf.  Investing in more than one mutual fund call allow you to gain an exposure to the various asset classes and investment strategies.  At the Unit Trust Corporation, we have a variety of funds including income funds and equity funds.  It is highly recommended that you carefully evaluate all the various investment vehicles before deciding where to invest. Remember that historical performance is no guarantee of future return, so you should choose investments based on a funds’ or investments’long-termoutlook, not which funds happened to do well last year.

The type of investments that you select will primarily be governed by the number of years until your child starts school (time horizon) and your risk tolerance. Stocks are very volatile and have the highest potential return, but they also have the highest risk.  Cash equivalents that include Treasury bills / Government Treasuries have the lowest risk since they are backed by the government, but they also provide the lowest potential return. Investors who have a long-term horizon and the ability and disposition to tolerate fluctuations in value will be more inclined to invest in stocks.  In contrast, investors with a short time frame and low tolerance for wide swings in value will prefer investment grade bonds and money market securities.  As such, the younger your child and the higher your risk tolerance, the more time you have to invest and be able to recover from any losses that you may incur.  As a result, it may be best to start with high yield high-risk investments when your child is young, and gradually shift your funds to lower-risk investments as college approaches.It is strongly recommended that you monitor and evaluate your investments periodically, such as every quarter, to ensure that you remain on track.

Saving for your child’s education is a priority for many parents. Whether they have only just begun to take their first steps or just given their first smile, the sooner you start planning for your child’s education, the less stress and anxiety you face in the future.

Financial planning for life events is a critical aspect of saving and investing. The Unit Trust Corporation has a wide array of products and servings to assist in achieving your financial goals. Log on to www.ttutc.com for more information.

Do you have any questions or comments about this column? Are there topics that you would like covered? Please e-mail us at news@ttutc.com.