Government education subsidies are reducing almost every year as a percentage of the full economic cost of the education. Student loans, which are increasingly difficult to come by, are challenging in terms of interest burdens and frequently still do not cover the student’s needs. By the time your child is nearing college or university age it is usually too late to begin making up for this shortfall. The planning process and commitment must be carried out in an informed, disciplined, and systematic manner

Why is it important to start right away?
Time is one of the most important advantages of investment planning. With the framework and discipline of education plans, you have the potential of realizing significant gains from seemingly minimal contributions. The power of compounding returns cannot be ignored. Consider the following scenario: Beginning when a child is newborn, Parent A invests $20,000 per year over a period of five years, and then stops. Parent B doesn’t start investing for the child’s education until it has reached the age of eight, but then invests $20,000 per year over the next ten years. Even though Parent B contributes twice as much as Parent A, when the child is ready for college or university Parent B’s investments will still not be worth as much as Parent A’s, and in fact they will never catch up. When the child is aged 18, the education savings will be worth $446,360 under Parent A’s plan, whereas Parent B’s will only be worth $350,400!

Taking of advantage of tax efficient instruments is of paramount importance as these investments will allow you to earn a better return on your investments over a longer period of time. These investments also encourage discipline and teach you to appreciate long term investments because of the benefits they afford.

Clearly, procrastinating can result in a costly price when it comes to planning for your child’s education. As the saying goes, time is money! You should also note that the more you or your child has to borrow for university or college is the power of compounding will work against you rather than for you.

Steps to consider in planning for your child’s education

Assessing your needs
Since the desired end result of every education savings plan is a stream of income that can adequately cover the costs your child will incur in obtaining his or her education, the first step is to estimate the outlays that you will have. You should consider tuition, books and other materials, and basic living costs. If the school to be attended is in another country, you should remember that travel costs might be substantial. You also have to consider devaluation of the Jamaican currency and you therefore need to protect your investments by investing in foreign currency instruments.

Understanding risk
When determining which financial instruments to incorporate into your investment plan, consider both the amount of risk involved and your own comfort level. Are you comfortable with taking calculated risks? Investing in stocks and mutual funds may serve you well. Or would you prefer a more moderate or low risk investment? Then you might want to consider bonds and money market instruments. Whatever financial vehicles you finally decided to put to work for you, bear in mind that experts generally recommend a balanced and diversified investment portfolio to mitigate against devaluation, inflation and risk.

Virtually all investments carry some level of risk. Even cash held in a savings account runs the risk of losing value due to inflation. Persons planning for their child’s education should consider that the younger the child is, and therefore the longer they have until college or university, is the more risk, relative to their own inherent tolerance that they can safely take on. This is more important in ensuring that the education fund is secured prior to the parents approaching pensionable age. This means that there will be more education funds available to the child along with higher returns due to the longer investment time period. This allows the parents to invest more and also benefit from the compounding effect of their investment. However, this also means they should be careful to consider reducing the risk level of their investments as the child gets closer to the tertiary level.

Investing
Once you have an idea of what you will need to provide for your child’s education, it is now time to explore your investment options and the options you choose will determine the expected returns. Your investment advisor will assist you in deciding how to allocate your investment dollar among the various options to achieve the highest possible return based on your risk appetite. Once the advisor has discussions with you with regards to your objectives, he or she will be able to recommend a diversified portfolio to assist you in attaining your objectives.

Ten tips to planning for your child’s education:

1. Save money as early as possible to help pay for your child’s tuition. Remember the power of compound interest and tax efficient products.

2. Encourage your child to make high school count, preparing academically for higher education. These years will determine what options and career paths are available later on. They may also determine whether your child qualifies for scholarships that would defray some of the costs of education.

3. Assist with honing your child’s skills and interests early in his development; introduce to him career options and the schools he may be interested in attending.

4. Meet with the high school guidance counselor to determine what schools match your child’s academic abilities.

5. Gather information about the schools your child may be interested in attending including information on available financial aid.

6. Assist your child in applying for admission at various and help him or her to manage expectations concerning acceptance into a particular school.
7. Explore scholarships, grants, bursaries and work-study programmes; complete any necessary applications or forms on time.

8. Consider education and/or student loans only after you have done the necessary research of all the sources of free financial aid. While a loan may be expensive, lack of education is even more expensive.

9. Research the loan programs available to you and your child which may include those offered by the Students Loan Bureau, loans by private lending institutions, commercial banks such as First Global Bank or credit unions, or loans offered by the school or organizations related to it.

10. Help your child to manage his or her student loan debt by deciding how much you and your child can afford to borrow and repay.

1. Compare prices – the wise shopper compares prices as well as the quality of goods and services, BEFORE going ahead with a purchase.
2. Buy affordable brands – the same item may cost significantly less based on brand (yes, the same product is often rebranded and repackaged and sold at different prices). Don’t be a slave to brands; go ahead and shop around, be a smart shopper.
3. Car pool – this is an effective way to save on petrol, and by extension, save money.
4. Buy in bulk – grocery bills add up when you don’t shop in bulk. Places like Costco should be your friend.
5. Shop around for the best deals – visit those quaint tucked away stores on the side streets where you’re likely to find bargains that are unlikely to be available at the more prominent stores.
6. Force yourself to save – investigate investment and saving plan options which require compulsory monthly or weekly savings (for e.g. via salary deduction).
7. Ask yourself, “DO I REALLY NEED IT?” – when shopping for clothing, household appliances and personal effects, always ask yourself if the item being purchased is to satisfy a ‘need’ or a ‘want’.
8. Shop wisely – by items that are durable and will last; for e.g. clothing and household items.
9. Know your rights – when buying items, ensure that you’re getting a guarantee/warranty, check for servicing and the availability of spare parts. etc.
10. Demand a receipt – demand a receipt for each purchase, and keep that receipt for as long as possible … supposed you need to exchange or return it … you need the receipt. Money saved right there!

1) Set a monthly savings target. Use a percentage of your income so that your target will increase as your earnings increase
2) Make saving easy – have your savings automatically deducted from your salary. With this direct deposit option, you remove the temptation to spend
3) Be consistent. As your savings accumulate, so will your interest and the compounding effect will accelerate your earnings.
4) Maximize your returns – review your savings account regularly and trade up to longer term, higher yield instruments at times. The type of investment instrument that you choose will depend on your stage in life, and risk profile …. thus, seek professional financial advice.

But that is just a feeling. The reality is you control your reality. Who decides on how much money you spend each month? Who decides whether you should go back to school and improve your skill sets? Who decides on the type of car that you drive? Who decides when you are going to use your credit card? Who decides if you are going to pay more than the monthly minimum on your credit card to save on interest charges?

And while you are still contemplating to the answer above, we can also say that one fact of reality is that it is unpredictable. Emergencies occur, expenses pop up out of no where, and investment opportunities present themselves. Yes, even in this economy, there are investment opportunities – if you look around and are in a position to act.

And that ladies and gentlemen, is the rub. Are you in a financial position to seize investment opportunities? Can you pounce on deals while being prepared for life’s unpredictable events?

If the answer is “no”; if you feel like a victim of the economy, then it’s time to do something about it. And really, it is all up to you. We have already discussed the security blanket of insurance that covers death, health, disability and the like. The next step in financial empowerment is a cash reserve.

The financial experts say that you should have six to eight months your living expenses in cash put down. This will tide you over and give you peace of mind, especially in this current situation we are in.

Many will question – how can I save when I have so many bills, so many expenses that I have to meet? Well the simple answer – and most difficult implement – is to treat your saving goal like any of your other bills.

1. Review your spending habits – be ruthless and cut out what is simply not necessary.
2. Set up a salary deduction for 10% of your salary – out of sight, out of mind.
3. Direct your savings bill to an instrument that pays interest. Let the money that you a putting away earn something. It doesn’t make sense for your investment to simply sit there and not grow or earn a very low rate, especially given where interest rates are low.
4. Do not touch the money!!! If you are drawn down on it, how will it protect you later on?
5. Once you reach your savings goal, it is time to consider investing in opportunities for the long term.

When you are feeling helpless in the face of economic turmoil, it is easy to rationalize not saving. But that is really giving away your control to others. So, speak to your licensed financial advisor about ways to manage your funds so that you can build your emergency funds and manage the economic storm that we are in. Building a cash reserve is an important investment in your future.

Credit union members enjoy many benefits, including lower loan rates, competitive rates on savings and lower fees, a say in how their financial organization is run, and many others.

Common Bond
Credit unions are for everyone, but a credit union’s common bond defines its ‘field of membership’ which could be a place of employment, a professional body, church or school association, or your community.

Here’s how to find a credit union to join:

• Ask your colleagues at work. Your company may sponsor a credit union or may be a sponsor group that has access to a credit union. Many employers may directly deposit your salary to the credit union.

• Ask your family. Does your spouse’s employer sponsor a credit union? Most credit union invite family members to join. Each credit union, however, may define ‘family’ differently. At some, only your immediately family members are eligible. At other credit unions, family may include extended family members such as grandparents, uncles, cousins and aunts.

• Quiz the neighbours and your friends. Some credit unions have a community ‘field of membership’ serving a region defined by geography rather than by employment or some other association. Parish credit unions fall into this category. Your telephone directory can also assist you in finding credit unions.