BEST OPTION TO INVEST FOR A KID EDUCATION PLAN

When a child is born in family everybody celebrates the arrival of the baby. But along with the celebrations comes a sense of immense responsibility towards ensuring the bright future of the child. The most important thing that needs to managed for child’s prosperous future is for sure the ‘money’. A family will need money for the child’s nutrition, comfort, play primary schooling, medicine, secondary schooling, higher education, marriage etc. The list can be countless, I am only counting those big-big events of the child’s life. But let me tell you that there will be countless miniscule events that will also consume money making the total a whopping amount. So better be prepared from day one than be surprised on the zero date. 

        

It is not required to list down each hand every activity in detail, but following a meet of thumb will solve 90% of your future requirements. Team of "GETMONEYRICH" has researched that saving and investing wisely 15% of total monthly income (your net take home) for your child’s financial planning will just right. The value of 15% has been estimated from that fact that after deducting all monthly bills, miscellaneous expenses, EMI payments, an individual family can manage this level of savings. For sure if the family is running too much loans (car loans, home loans, personal loans etc) he will probably find 15% as too high. However, parents must understand that savings is not investing.

First of all when you are saving for your child’s future you shall do this first thing in the month. Create a separate savings account for your child and remit the 15% amount first as soon as your get your monthly pay cheque. This is a very important rule. Never let yourself drowned in the thought that after you have paid all utility bills, and managed all monthly expenses only then your will set aside the balance left money. There will never be enough left-out money in your bank unless you are saving this as first thing in the month. Money has wings and if you will not lock it, it will fly. So saving early in the month is a magic that all must follow, specially for your child’s future where you do not have an option to compromise.

                               

“An investment in knowledge pays the best interest.” -Benjamin Franklin    

 

The send magic rule as I call it “giving money the power to multiply”. Money stored in your bank’s savings account will be heavily beaten by the high inflation rates. The money in savings get jarred and tattered and succumbs to lower valuations due to inflation. This is your money biggest fights, to fight inflation. Not only you have to beat inflation, but your need to multiply your money faster. Of course by saving money (15%) you have covered a majority part of your responsibility. But investing to beat inflation is also as essential as savings itself. On an average the inflation in Kenya is hovering around 5.5% to 12.5% per annum. So matching inflation itself is difficult leave aside beating it, this is the reason why proper investment planning is required.

The negative effects of inflation will hardly leave us with anything in the end if we choose to save money in bank deposits or any other saving instruments that offer very less returns, while an investment with good returns will keep us financially secure. By investing our savings, we can ensure the safety of our money and earn good returns. This will leave our children financially secure. The following tips should help one to make an appropriate investment plan for the children’s future.

a) Know your plans:

It is always advisable to start saving as early as possible, but we need to plan before we start our investments. Planning is the first step to be taken before starting our investments because it is for the future of the child. We should understand how much money would be required for the child’s school education, higher studies, wedding, etc. The other important factor we need to remember is the expected rate of inflation and its effect on the value of our returns.

   

b) Set up goals:

We need to set up goals before we make our investment decisions. All our investments should reflect our needs. Although individual goals will vary from person to person, it can be commonly categorized as short-term goal or long-term goal.

For example, 

Long-term goals for your child could be the money required for undergoing a professional course abroad, capital required for a business venture (if he/she wants to be an entrepreneur), money required for wedding, etc. Investment in the stock markets could be a best choice for your child’s long-term plan but the level of risk is higher and so are the returns. Most of the studies have also suggested that investment in equities offer higher returns. Long-term goals can be achieved by putting your money into “investments” – meaning instruments that carry the risk of eroding the original capital yet having the positive risk of increasing in value to beat the effect of inflation. At the same time, endowment type plans, public provident fund-type low-return plans, etc., should be a least priority item on your investment list if you need to fight inflation on your returns.

                     

 
While considering real estate-type investments for long-term goals, plan them in such a way that you can exit the investment at least two years before the actual need. This way you will have the time to overcome any negative growth. For example, if you want money for your child’s marriage, sell off the piece of land when he/she is in final year of college and put the money in a low-risk instrument.

The short-term goals could be schooling in an international school, other extracurricular courses, training and participation in live contests within the country or abroad etc. Invest in funds with more liquidity for the short-term goals. The best bet for short-term goals is “savings” instruments, meaning those that will guarantee return of the original capital even if there is no growth. Savings bank deposits, short-term FDs (Financial Derivatives) , etc., come under this category.
                                      

c) Tax Implication: 

When planning for your investments you must be aware about the tax laws and how it will affect your investments. There are investment options to by pass taxes. If you are not able to understand the complex world of taxes it is better you hire a tax consultant to get the picture.
          

d) Choose the right Investment plans:

It is not enough to choose to invest, but to choose the right investment plan. Consider your income and the amount you can spare for investment, analyze the time in hand, the level of risk, liquidity, returns, the capital appreciation, etc., before making your investment decisions. The returns that are expected should be sufficient to meet your needs at that time, so be careful while making investment decisions. Try to avoid investments that carry higher risk and investments that offer returns that might be fluctuating; by choosing such plans you are only going to carry more amount of risk.
      

Best investments for the child future and education



1. Insurance Plans: There are various children insurance plans available which covers risk coverage for the parents. The insurance plans should be taken on earning parents. The plans selected should provide long term advantage to the children. There are number of Insurance plans offered by Jubilee Insurance Co. , Kenindia Assurance Co., Britam and other insurance players.

 

 
2. ULIP’s: Unit linked insurance plans provide better returns than a fixed deposit or comparing to a normal insurance plans. The insurance provider allocate units (similar to mutual fund units) at a specific price and the they invest such money in high yielding stocks/mutual funds. Higher returns expected in such ULIP’s. There are various insurance companies which are offering ULIP’s. Based on the time period and the insurance value, one can choose the best plan suitable for them.  

3. Mutual Funds: Another alternative is to invest the amount in high performing mutual funds. Average returns received in the last 10 years are 18%+ per annum which are almost twice the returns compared to bank fixed deposit. If a parent invests ksh. 3,000 per month in Mutual fund SIP (Systematic investment plan), the amount received after 22 years is awesome. This is one of the best bet on creating a wealth for the children 

4. Public Provident Fund (PPF): Investing in PPF is another alternative investment available. Currently, PPF account is offered by NSSF, Britam, CFC Life Assurance etc . This account has a lock-in period for 15 years. The minimum investment would be Kshs. 5000 and max of Kshs. 1,000,000. The rate of interest is decided by Government of India on yearly basis and currently (effective from 1-Apr-12) it is 8.8% per annum. PPF account has received 9% interest rate earlier when banks were offering 7 to 7.5%, hence on long term we would be getting higher returns on PPF compared to bank fixed deposits. The investment is 100% safe as the investments are done with Government of Kenya.

5. Buy a certificate of deposit, commonly called CDs. When people call them money in the bank, they are exactly right. They are time deposits with a fixed interest rate that are required to be held for certain periods of time until they can be withdrawn. At maturity they can be withdrawn, along with the accrued interest. They can also be rolled over again and again, making you more money.

6. Real Estate: This is also a value appreciating assets like the bullions. One problem though, is that land or property is hard to buy, considering the huge amount needed to acquire it. However, real estate has the potential to provide a steady flow of income in the form of rent. It can be used as collateral in obtaining huge amounts of loans. Moreover, your children will feel secured growing up as there is a definite way to cover up their future expenses for education and living.
                 

7. Equities: You can buy stocks in the name of your kids, but remember that investing in shares is highly risky. If you feel like the market will go up then invest long-term in stocks with a good track record. In comparison to stocks, it is always better to invest in mutual funds as your fund manager will know better about the markets than you do. Any way, do not invest your bulk savings into equities for kids, but rather choose to invest 10% to 15% of your income into it. For better earnings over a long term, you can opt for an SIP plan to invest in mutual funds for kids.

 

8. Use the Rule of 72 to double your investment: This rule can work for you when you put money into a savings account with compound interest. If you divide 72 by the interest rate, the answer would be how many years that it will take for your money to double. For example, suppose your interest rate is 9 percent. You would simply take 72 divided by nine to come up with eight being the number of years it will take for your money to double.

Author: Murigi Benson - Financial Consultant

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