It's never too early to start building junior's nest egg
They say children are priceless but, as any parent knows, they sure do come at a cost. Parents always want the best for their children and that means everything from swathing them in organic cotton rompers to making sure they eat three square meals a day.
Aside from retirement, people name saving for their children's education as the biggest investment goal. It's no wonder.
In Hong Kong, financial advisers warn that parents must save about HK$2 million just for university alone for each child. The amount sounds enormous, but remember that many parents send their children abroad for college, incurring even bigger expenses than if they go to a local university.
Add to that the costs of private primary and secondary schools for some parents, and the few tax breaks the government gives parents for university expenses, and it's enough to bring on a few early grey hairs.
But you can gain peace of mind if you keep a few pointers in mind when raising your children and saving for their future.
1. As with anything, start saving early
Often, parents don't seriously do anything about educational savings until their children reach five or six, when they must evaluate their children's educational paths. And those are the efficient parents. Many parents don't begin until the children are much older, leaving a big funding gap once he or she prepares for university. That's a big mistake. The earlier you start saving, the more time you give your investments to grow and - most importantly - to weather any cyclical downturns.
While it would be ideal to begin saving for your children right from the starting gate, give at least a 10-year horizon for your savings and returns to accumulate.
2. Save regularly
The most painless way for people to save is to do it regularly and in small amounts. But it's also the smartest way. That's because you not only get the benefits of dollar cost averaging by putting in a consistent amount every month, but you also receive the benefits of compound interest.
If you figure it costs about HK$2 million to pay for one child's university education, you would have to put in about HK$1,800 a month for the next 20 years, provided your annualised rate of return is 10 per cent.
Up that monthly amount a bit - say, to HK$2,000 a month - and you can shorten the number of years you need to save. The key is to do it in small amounts on a regular basis.
3. Stock it up
There are a variety of ways to invest your money, but time and again, financial advisers have recommended putting your monthly educational savings in equity mutual funds.
Over the longer term, these funds give you better returns than bond funds (though as I have written before, bonds have a special and definite need in your overall investment portfolio).
Ricky Tam, chairman of the Hong Kong Institute of Investors, recommends a mix of mutual funds and ETFs (exchange traded funds that mirror the diversification of mutual funds but can be traded like stocks).
One ETF he likes particularly is the Tracker Fund of Hong Kong (TraHK), which mirrors closely the Hang Seng Index and comes with a low management fee.
Mr Tam also advises that one should forget about special 'educational' funds offered by banks and financial services companies.
'Over time, their returns are not any better and are actually worse than if you put your money in a regular mutual fund account,' he says. And unlike in the US or Canada, Hong Kong residents receive no tax benefits from investing in special educational funds.
4. Rein In other costs
Did you know that it costs more to have your first child than your third? For some obvious and not-so-obvious reasons, having three children, for instance, does not mean the cost of raising them will triple.
In fact, parents spend just a little bit more raising their third child as their second one (excluding the cost of school tuition, which does triple). That's because some of the biggest expenses are set - housing, for instance, or a nanny or helper. And by the third child, you can imagine parents are discovering the virtues of handing down clothes and buying cheap and in bulk (and eating at home).
But that doesn't mean first-time parents shouldn't think about reining in costs if it means they can save a bit more for the future. Advertisers are great in taking parents on a guilt trip, so think carefully before buying that Burberry sweater for your toddler. One spaghetti meal and it's not a sweater anymore - it's a napkin.
5. Teach your children the virtue of money
Children will come a long way knowing that not only does it take a lot of work to make a dollar, it also takes a lot to make the dollar work for you. That's the best peace of mind you can have when you send them off to university ... with the money well saved and spent.
