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The best practices in preparing for children’s education
By The editors from The Edge
Most parents are concerned about doing the right thing for their children. They want their children to get the best care, the best growing up environment and most importantly the best education that could ultimately lead them to be financially independent. According to a recent study released by UK-based Varkey Foundation, 75% of Malaysian parents still place heavy emphasis on their children entering university.

However, the process of preparing for children’s education can be overwhelming, especially as it involves handling costs for a milestone event that will only take place more than a decade in the future.

So many things could go wrong. Hearing stories of parents who only later in their lives realise that they were not saving enough exemplifies the point. Sending a child to England, for example, may burn a deeper hole in parents’ pockets today compared to 10 years ago; yes, the government tripled the maximum fees in 2012. Parents may now need to pay as high as £9,000 per year for their children’s education in London, compared to just £3,000 a decade ago.

To help parents keep everything in check, Michael Lai, vice president of Wealth Management Research of OCBC Bank (Malaysia) Berhad shares the top three best practices that parents can adopt and top three common mistakes that parents should avoid when preparing for their children’s education.

Best practices to adopt
The best practice that parents can adopt to ensure a smooth preparation for their children’s education is starting early. There is no such thing as being too early; some, commendably, start as early as when they are trying to conceive.

Parents must capitalise on the opportunities that come with a longer time to accumulate funds. The earlier parents prepare, the less they need to fork out every month, making it less stressful for them to meet their eventual goals.

However, as every family has different needs and aspirations, there is no ideal percentage of income that parents must set aside for their children’s education fund. Therefore, it is good if parents can start to at least work towards saving for a more affordable general degree for a college in Malaysia and save up for a more expensive option as and when they are ready.

Some parents may ask themselves whether it is wise to invest their children’s education savings in the hope that it grows. On the one hand, they may feel that they should not touch the money and on the other, they could stand to generate good returns that help to expand the fund.

It should be a combination of both. To do this, parents should place part of their savings in an account that gives them a high-interest rate. This provides them with the flexibility of taking out the money to take advantage of different investment opportunities while still earning a good interest rate.

Goal-based investment should centre on the time horizon of the goal. A longer time horizon will allow for more volatile assets such as equities to supplement more conservative fixed income assets such as bonds and government securities. As the time to achieving the goal draws nearer, the investment portfolio should shift to less volatile assets. Parents should also be vigilant to ensure interest income or dividends are reinvested to enjoy the benefits of compounding.

Some parents might be savvy enough to take advantage of all the tax incentives available to them, but, for most, analysing the list of tax incentives can be daunting and confusing. Here are some of the tax incentives that parents are eligible for when it comes to their children’s education.

  • Up to RM8,000 per child currently pursuing high education.

  • Up to RM3,000 for insurance premiums that are education-related.
  • Up to RM3,000 for purchase of books, computers and internal bills.
Common mistakes to watch out for
At the start of their preparation, most parents might have made a calculation to determine the end goal of how much they need to save to pay for their children’s education. However, some may neglect to add inflation into the equation.

Not only does inflation affect the tuition cost, it also affects the overall cost of living. This may cause the actual cost to be way off the amount anticipated.
 There are three inflation points, namely currency exchange rate, overseas inflation and inflation of education costs. As each country has a different inflation rate, parents should factor in the appropriate one.

Busy working parents may not have much time to review the savings and investments that they made for their children’s education. However, parents should review the savings and investments twice a year – similar to dental appointments – to look at how their investments are performing and what adjustments they should be making to ensure they are on track to meeting their goals.

Reviews are important milestones for many reasons. This includes adjusting to currency exchange rates, making progressive adjustments to the initial cost estimation and reflecting on unforeseen changes. A regular review routine helps to avoid unwanted surprises that may end up involving difficult multi-year adjustments if left undetected.

In some instances, parents who discover insufficient funds for their children’s education may end up withdrawing from other funds available to them, such as their Employees Provident Fund (EPF).

Although this may seem like a logical move, parents should only dip into their EPF as a last resort. Your EPF is primarily to sustain you through your golden years; so parents should be careful when taking out the money for purposes other than retirement.