Every Young Parent’s Struggle: Planning for Children's Education

Educating your kids has significant implications on your financial wellness - it can be expensive. Nonetheless, every parent's dream is to offer their children the best education money can buy.

But it is not always easy. 

Consider this: Tom and Kamau have kids who just completed their secondary school education. Although his son passed the exams with flying colours and is ready to join university, Tom is barely prepared financially. He has no savings set aside to cover the costs of his son’s university education. Tom is now thinking of selling his plot or car to help raise funds needed for this transition.

On the other hand, Kamau is fully suited up. He has his son’s education fund already set up. He started planning for this day several years ago, and now he is financially prepared for the transition. 

Who between the two do you think is better off? If not careful, this transition might financially set Tom back a couple of years. But Kamau has nothing to worry about. 

Also read: Money & Me: Were My College Degrees Really Worth the Money?

This shows the situation on the two opposite sides of the spectrum.

And although there are different ways you can plan for your child's education, there is no one-size-suits-all strategy. As a parent, you need to draw plans, craft strategies, and identify the suitable ways to cover your kids' education. 

Since the year 2000, the median cost of college education has been rising at an annual average of 6.8%. In days to come, and given the fast rising inflation levels, this is likely to go higher. As a young parent, it is, therefore, crucial to consider your timelines and plan for any changes that may arise along the way. As they say, preparation is better than cure. 

Read Also: Rising Inflation: Where Should You Keep, Invest Your Money?

So the earlier you start, the better.

But where do you start, and how do you safeguard yourself as a parent? Let's learn this.

Traditional Ways of Funding Education

Whether in rural or urban areas, quality education is key to all. This has been the stance of every parent. Parents, although many were uneducated, held education in high regard. They toiled to see their children in school. In the same manner, the government was busy building more learning centres.

It was possible to fund education in one of the following ways:

A Parent’s Income

People relied on their income to pay for their children’s education. In families where income was not enough, a parent would seek a salary in advance. Most parents also relied on older siblings to help fund the education costs for the younger siblings - commonly known as the black tax. 

In recent times, it’s possible to finance education with your income. You only need to plan what you earn against your daily expenses, longer-term financial goals and other emerging bills.

School fees Loans

Previously, many relied on farming to finance their lifestyles. The proceeds were enough to feed and educate their children. If a parent were stuck, one would seek a school fees loan from institutions that they sold their farm produce to. 

Their produce guaranteed it. Parents ensured their maximum yield from farms or livestock to pay back the loans.

Bursary

With time, most of the thriving firms began to shut down. Returns from agriculture, especially after the collapse of the export market cash for crops such as coffee and pyrethrum, started to decline. Families who had a stable source of income were unable to meet most of their essential needs. 

The government decided to step in with scholarly aid. Bursaries to assist bright students from poor backgrounds were introduced - they persist to date. These initiatives are, however, stained with opaqueness such that there is no guarantee funding will go to a needy, or every needy student. 

Also read: Fun Ways To Teach Your Children About Money

Proactive Children’s Education Financing Options

In modern times, there are many ways you can plan for your kids' education. Do not wait until the fees are due to start thinking of where to get the money. Here are your options:

Money Market and Mutual Funds Account

Money Market funds provide a great avenue to invest in your kids' education. In the market, you invest in a pooled fund. A fund manager manages its operations. You can start small and consistently grow your portfolio.

This type of account earns typically higher interest than the ordinary savings account. Returns from this account are modest, ranging from 4% to 10% per annum.

Furthermore, your money is safe, and there is a guarantee of earning interest daily. The interest generated from these funds can be reinvested  to take advantage of the power of compound interest such that by the time your child needs the money for fees, it will have grown exponentially. 

Invest in Stock Exchange

Become a shareholder of reputable firms by being a shareholder in a firm listed in the securities exchange market. The idea is to identify and invest in companies that are doing well overall, and those whose expected returns project growth.

When you invest in the shares of a company with a history of paying double digit dividends you protect your cash from inflation and stand a good chance of even multiplying your initial investment. 

When your child(ren) is ready for college, or even secondary school, depending on where you need to start utilising the money, you should have increased your investment to cater for all your needs. 

Note that investing in stocks is a high risk - high reward undertaking that should not be ventured into on a whim. If you are taking this option to create a fund for children’s education, it is especially important to consult an expert who can guide you through building a balanced portfolio that comes closest to protecting your principal and giving you the highest possible chance at multiplying your initial investment.

You can utilise returns from investment in the stock market to fund your children’s education in two ways;

1. Dividends - using the history of dividend payments by the company or companies you intend to invest in, you can settle on an amount that would result in annual dividends equivalent to the projected cost of education when the money is needed. Note that previous performance of a stock is no guarantee of future performance - that is why a financial expert is important. Using this method, you will just need to channel your annual dividends directly to school fees and altogether keep your investment and continue enjoying the dividends even after your children have left school and are earning their own money.
2. Liquidation - you can also choose to sell off your stakes in the companies you have invested in when your children need the money for school. This is under the assumption that the value of the shares will be much higher than your initial investment, giving you enough money to see them through college. 

Of course, you always have to bear in mind the risks associated with the stock market which may make it a less attractive vehicle to bet your children’s future on. The fact that you must have money when your children need it means you have to be very careful with the decision to bank it all on the stock market. Nevertheless, the stock market, if it goes your way, can easily make you a surplus to even cater for needs beyond your kids’ education. 

Saving Vehicles

There are a few savings vehicles that not only guarantee the safety of your money but can also earn you money on top. They include:

• Sacco. Saving in a Sacco can be a great option if you are looking for a low-risk saving option for your child/ren education fund - you can also earn some of the highest interest rates in the market on your savings through dividends. For the 2021 financial year, leading Saccos in Kenya paid out double-digit dividends ranging from a low of 10% per share to a high of over 20% per share. If you keep reinvesting your interest, you can easily double or triple your initial deposit before your kids are ready for college. You can use the rule of 72 below to determine how many years it would take to double your investment in a Sacco or any product with a fixed compounding interest rate. 

Read Also: What Is the Rule of 72 and How to Use It When Investing?

• The Traditional savings account. Saving in a traditional savings account is also another way to plan for your kid’s education. Although small, you can also earn interest from a savings account. In Kenya, interest rates for bank savings accounts range from a low of just 1% to a high of 7%, which is just above the annual inflation rate of about 5.a% in 2021.

• Fixed Deposits. These are investments in which you can put a sizable amount of money at a predetermined interest rate for a fixed period. Most FD accounts offer interest rates that are higher than the annual inflation rate, which in 2021 was about 5.4%. As such they offer an effortless and low-risk way to save for your child/ren education without worrying about market fluctuations. 

Also read: Where Do I Keep my savings? The 7 Main Places to Put Your Savings

Treasury Bonds

These are financial instruments utilised by the Government through the Central Bank of Kenya (CBK), to raise funds - the government is borrowing money from its citizens. 

Treasury bonds are medium- to long-term investments, and their maturity can range from 1-30 years. With most bonds, you will receive interest payments every six months throughout that period of time, and at the end of that period you receive the face value amount that you invested. The interest rate ranges from 7% to 14% depending on the tenure and amount. 

By investing in treasury bonds, you're giving a loan to the government. A government bond offers you a consistent and assured source of investment income and is very low risk. You're entitled to receive a coupon and interest payments at planned intervals.

Besides, you'll receive your capital investment at the agreed maturity date. Bonds offer higher returns compared to bank savings - it’s also a great way to hedge against inflation. If you are, let’s say, in your 30s a 10-year bond can offer an effortless way to save for your child/ren’s education in a way that guarantees that your money will grow. 

Securing Your Kid’s Future in case of Incapacitation

Death, accidents, chronic illnesses, and other life-threatening challenges that may hinder your ability to earn an income are a reality and must be anticipated. You can't overlook the need to educate your child even then. Since you cannot work as you used to, taking a loan can be ill-advised. It will only lead to debt accumulation, creating more challenges.

There are numerous options to cushion you in case of a mishappening;

Also read: 5 Things to Consider Before Passing an Inheritance to Your Children

Life insurance and personal accident cover

Invest in contributing premiums for a life insurance policy. Upon death or disability of the contributor, the beneficiaries receive the insured amount to cater to their needs. With life insurance, the beneficiaries decide on how to use the money. It could pay for daily bills or pay for college. It is possible to leave explicit instructions in a will that ensure the compensation is utilised specifically to ensure your kids are seen through college. 

A personal accident cover, which is different from a life cover, ensures you can take care of your needs in the event you are unable to continue earning an income as a result of an accident. Even when you are saving in a money market fund or other savings avenues such as Saccos, you should seriously consider taking a cover that protects you against the huge troubles of inability to earn an income due to incapacitation. 

Personal property

When it comes to your child/ren’s education, you can never be too prepared. 

If you have any property that could be used to fund their education, it is crucial to have proper plans in place to ensure nothing goes wrong in case you are incapacitated. That is why it is advisable to have a will in place. Design a will that stipulates how the property will be managed to educate the children in your absence. 

Education Insurance Policies

As earlier mentioned, an education policy is another type of life insurance policy that is designed to cover your child/ren college education whether you are alive or not. It allows you to make a long-term financial commitment to your child’s education. 

Typically, in an education policy, the parent/legal guardian is the policyholder while the child is the life assured. You can buy an education policy even as soon as the child is born and make monthly, quarterly, semi-annual and annual contributions. This way, you will have saved a considerable amount by the time the child is of school-going age, is ready to join university, or in case of any other eventuality. 

Additionally, some educational insurance plans(popularly known as unit linked child plans) are designed as insurance-cum-investment products. These types of education insurance options typically put a portion of the premiums paid towards life cover and a portion is invested in funds as per the policy holder’s discretion.

One example is the Britam super education plus policy which is designed as a combination of savings and insurance protection that allows you to prepare for the cost of education.

The type of policy you should use depends on your goals. The most ideal option would be the one that matures when your child joins university or one that doesn’t have tough restrictions on when you can withdraw your funds.

Also read: Who Qualifies for HELB Loans; Undergraduate, TVET, Graduate and Scholarships

Winging it?

It’s possible to worry about your child's education due to financial needs. It’s also possible to manage your income so that your child attends the best affordable learning institutions.

The learning exposure could open your child to be the next renowned entrepreneur or investor and industry titan. Education is a valuable investment in your child's future.

The cost of education is soaring higher. A high school certificate is a basic necessity, and attaining a college education is mandatory for a better quality of life. If you want to have your child/ren set up for a bright future, winging it just won’t cut it. You need to be well prepared. 

It's not cheap, but you can plan for it. 

Go for financing options that suit your income level.

Also read: How to Apply For HELB Undergraduate & TVET Loans 2021