(This is part of Take Charge of Your Money , a partnership between INQUIRER.net and Citibank to help readers handle their personal finances well.)
Question: I have two daughters and while they are still in grade school, my wife and I would like to start saving for their college education. We know of friends who got educational plans from companies that went belly up. What is the best way to save for college? — Vic E.
Answer: Even if your daughters are still in grade school, now is indeed the time to start saving for their college education. In fact, the earlier, the better. Remember the saying, “The early bird catches the worm?” In financial terms, that means the early saver will catch more interest income, thanks to compound interest.
Before we go into savings strategies, let’s start with something you should do first: Have a target college in mind. This does not mean that your daughters have to go there in the future. It will just help you quantify that goal and make it more real and attainable.
A recent news item in the Philippine Daily Inquirer shows the current per unit cost in some universities:
* University of Asia and the Pacific: P2,400
* De La Salle University: P2,045.33
* Ateneo de Manila University: P2,517.03
* University of the Philippines: P1,000
* San Sebastian College: P786
* College of the Holy Spirit: P903.91
* Polytechnic University of the Philippines: P12
* University of the East: P1,040
* Far Eastern University: P1,100
* University of Santo Tomas: P1,072.90
A semester’s full load may range from 18 to 23 units, depending on the school.
Given this list, you can at least have a target of how much you will need to have your daughters take a four-year college course by the time they turn 16 or 17. Because tuition fees go up every year, factor in at least a 10 to 15 percent projected increase every year.
There are generally two ways to save for college: through educational plans or through a personal investment strategy.
Educational plans these days are not the same as the traditional plans issued before, when pre-need companies guaranteed the payment of tuition fees regardless of the amount. Because actuaries did not foresee the deregulation of tuition fees, they were not able to factor in the sky-high increase in tuition fees annually. This led to the collapse of the traditional educational plan.
Nowadays, you can buy an educational plan in units and pay for it in five years’ time. In the future, you will be able to get an agreed amount that you can use to pay off your daughters’ college tuition or use it in whatever way you like. The beauty of educational plans lies in its insurance component: If anything happens to you, the plan will be considered fully paid even if not, and your children will be able to use the money for their college education.
Another way is to make your own investment portfolio. Every month, set aside a fixed amount (preferably the same amount you would have paid for an educational plan) in a separate bank account. Once there are enough funds in your account, move your funds into a potentially higher-yielding investment such as a unit investment trust fund or a mutual fund. Both of these are pooled funds where small investors’ money are pooled together to be invested in money market instruments, bonds, or stocks.
Investing in a pooled fund allows you the opportunity of growing your money more, as money market instruments, bonds and stocks may potentially give higher yields depending on the market. There is a certain amount of risk with each kind of investment, so go into investments you are comfortable with.
There is no way to predict the way investments will go, but over time, it has been proven that bonds and stocks give higher yield than regular time deposits and savings accounts.
A good rule to follow is to choose an investment closest to the current inflation rate. If you can have an investment that will give you a return that’s higher than the inflation rate, you would have beaten the effect of inflation on your money’s purchasing power.
Some people get enticed with investment schemes offering interest income that’s way too high and too good to be true. Look at interest rates of bonds first to see what interest on investments should more or less be like.
As with all other investments, the less you touch it, the better. Do not withdraw from your investible funds as much as you can so as to preserve your capital. In time, your capital and interest income will work to bring you closer to your financial goal of sending your kids to college. We wish you the best!
(INQUIRER.net and Citibank invite readers to ask questions regarding financial matters. Send your questions to personal_finance@inquirer.net or comment through our personal finance blog called MoneySmarts )
*Disclaimer: Readers are solely responsible for their own investment decisions and should thus conduct their own research and due diligence and obtain professional advice. INQUIRER.net will not be liable for any loss or damage caused by a reader's reliance on information obtained from our web site. INQUIRER.net receives no compensation of any kind from companies or industries or funds that are mentioned here.
Related Site:
Citibank
