Millennials are now becoming fathers and mothers. Some of them enjoyed free education from government schools and some didn’t. But it is becoming clear that education provided by the government today is next to sub-standard in terms of quality and relevance. It is clear that quality education is the divider between the haves and haves-not. And that is why folks from the diaspora tend to secure more job opportunities and command higher wages when they return — they are exposed to far better quality education as compared to their local counterparts. But today we won’t be looking at the decadence of Nigeria’s educational system, rather we want to see how we can structure an Education Fund that will put parents in a better financial position to fund their children’s education. Quality education has become quite expensive as tuition prices are on the rise, and these prices will likely continue to escalate as your kids get older. Quality education in Nigeria is no longer a right but a privilege. Parents these days are struggling to offer their wards the best they can muster and afford and it’s taking a toll on their finances. But what about if I told you there’s a more convenient way you can go about financing your kids’ education without facing a heavy burden all at once? The answer — start building an Education Fund today!
What is an Education Fund?
An Education Fund is simply a fund set aside for the education of your child or children, whether at the secondary or university level. These funds are begun to be set aside from when the kids have or haven’t arrived. These funds are more long-term in nature. It’s a continuous and not a one time thing. It’s easy to say, “oh, I’ll do that later” and all of a sudden payment time is here!
Now before I go any further, I’d like to speak to you if you’re single. I’m sure you’d say to yourself, “I’m not married”, “I don’t have children”, “when I get there”. But from someone who has advised multiple clients, I’d strongly advise that the safest and smartest thing to do is to start as early as possible. It’s important you start to factor your unborn kids into to your financial plan from now cause raising kids can be quite expensive. Moving on!
Secondary school tuition is a neck breaker. Some schools’ tuition fees are between ₦1m — ₦1.5m per annum for a child. Meaning for 3 kids in secondary school that’s about ₦3m — ₦4.5m per annum. Wow! University tuition fees too are not a walk in the park either. Some private universities charge between ₦800k — ₦1.2m per annum. And for those looking overseas, tuition fees abroad as an international student ranges between ₦6m to ₦18m per annum. This will only get higher as our foreign exchange situation likely worsens. And while planning, the prudent thing to do will be to consider this without any form of scholarship or grant. So you can see how neck and back breaking education costs are if you plan to pay fees directly from your pocket without building an Education Fund. No wonder most people are only having 2 kids these days. It’s more economical. I wanted to have a large family before, Italian style. I was looking at 6 children — 4 boys and 2 girls. 🕺🏼 But economic realities have hit and plans have changed.
Parents and singles, please start an Education Fund for your children and unborn children. I know it’s not going to be easy but trust me it will be worth it. I remember a senior colleague of mine paying his son’s university tuition with an investment he made in a dollar asset some years back. It was the yearly interest and not the principal that was being used to cover his son’s education costs. Stress free, right? He didn’t have to start jostling and hustling for funds to meet up payments. He didn’t have to start saving for 3 — 6 months before making payments, denying himself unnecessarily or putting a freeze on all other family expenses. It was effortless! Don’t you just like that?
Where should you invest your Child’s Education Fund?
In this article, we would focus more on setting up an Education Fund for your child’s university education. Nevertheless, what would be discussed is also applicable to parents or singles interested in setting up an Education Fund for their child’s secondary school education. The only difference would be the time to accumulate would be shorter [typically 10–12 years] and won’t enjoy the compounding effect long enough as compared to preparing for university education [typically 16–18 years]. Also, the amount to contribute would be higher, and draw-downs for payment will be sooner. But asides all these, the mechanics for setting up an Education Fund for both secondary school and university education are pretty much the same. Now since the Education Fundis a long term fund that won’t be used in the short term, you should look at investing it in a mix of asset classes like equities, fixed income, USD assets, real estate, mutual funds, etc. A proper asset allocation that will match the investment objective [Education Fund] and the tenor is very essential. If you are sending your kids overseas, then you should consider investing in USD assets that will protect the Fund from likely future Naira devaluations which can significantly impact the performance of your investment. Also, your enemy inflation will be at work here again! Inflation is going to make the money you’re investing fall short of what is needed to cover your child’s tuition and other expenses. So you need to beat him by investing at a rate higher than the inflation rate or at the very least tracks the inflation rate. Another advantage is a friend I haven’t introduced to you yet — Compound Interest. He’s every investors best friend. I’ll tell you more about him in my next article. You’d be glad I did.
How much should you have in your Child’s Education Fund?
Now this might be a bit tricky as the plan will vary from one person to another. A person might decide to send the kids to federal or state universities. Another might decide to send the kids to foreign schools. And others might decide not to send them at all, opting for coding classes. Others may opt for private universities. But what you can do is find out how much it costs today, when you would need the funds, how much you’re willing to set aside and how frequently. For example: If a client [Afolasade] walks up to me and says, “Damilola, I have a daughter that I want to give a decent university education, how much do I need to be investing to meet that objective?”, I usually respond with the following simple questions;
- How old is your daughter?
- At what age is she likely to start her university education?
- Is her university education in Nigeria or overseas?
- How much does it cost today?
- Do you think you can afford it? Do you expect an increase in your future earnings? Are you willing to commit and stick to a plan without touching the funds?
And Afolasade says;
- 2 years old
- 16 years old
- Overseas, the US
- $100k [4 years of tuition + etc]
- Yes, I can. I’m also working very hard to grow my income. I won’t touch the funds.
So from the above I can draw a simple investment plan for Afolasade to build her daughter’s Education Fund for the sake of this article. But before I do that, I’d like to let you know that there are moving parts to building a ‘real’ Education Fund — the inflation and exchange rates are some of the moving parts. The inflation rate can impact the purchasing power of the currency [USD] in which Afolasade is investing into, and the exchange rate can also impact the amount Afolasade is contributing to the investment. For example, the cost of university education in the US today might be $25k per annum and in 16 years it could have risen to $40k per annum due to inflationary pressures over the years. And as for the exchange rate, the Naira to the USD might likely fall in the course of investing in the Education Fund. For example: Afolasade could be investing $1k per month which is ₦360k [assuming $1: ₦360]. If the Naira falls to $1: ₦400, she needs to be contributing ₦400k per month, an extra ₦40k.
Afolasade’s Investment Plan:
Since her daughter is 2 years old and would start her university education at the age of 16, it means Afolasade has a 14-yr period to build her daughter’s Education Fund. Afolasade would need to be investing a minimum of $600 monthly at 7% per annum for the next 14 years which would give her c.$168k but after adjusting for average inflation rate of 3.5% [in USD] over the 14-yr period, Afolasade would still have c.$104k, $4k above her target of $100k in her daughter’s Education Fund. This puts Afolasade in a more convenient and comfortable position to meet her daughter’s tuition fees. She can start drawing down on the Education Fund right away! Smart, right? Let’s quickly look at another example: Fabian is a single man who wants to start building an Education Fund for his unborn child. So I ask my regular questions and he replies with the below;
- No child
- 16 years old
- Nigeria, Private University
- ₦6m [4years tuition + etc]
- Yes, I can. I’m ready to be more prudent and grow my income
Fabian’s Investment Plan:
Since Fabian doesn’t have a child yet, we can estimate he has at least a 16-yr period [it could be more] to build his child’s Education Fund. Fabian would need to be investing a minimum of ₦50,000 monthly at 14% per annum for the next 16 years which would give him ₦32.8m but after adjusting for average inflation rate of 11% [in Naira] over the 16-yr period, Fabian would still have ₦6.1m [₦100k above his target of ₦6m] in his child’s Education Fund. This puts Fabian in a more confident and self-assured position to meet his child’s tuition fees. He can draw down on the Education Fund and make payments right away! Badass, right?
Now I must confess that the above investment plans are very simplistic and straightforward in nature and was done so for easy comprehension, but nonetheless the principle and concept behind both are sound and practical. In reality, one or more assets can be combined; assets will be allocated & rebalanced accordingly; cash contributions can also increase as the earning capacity of parents increase; and many other factors.
Like I said earlier, Education is the big divider between the haves and haves-not. In this era of globalisation, children aren’t just competing with their local peers anymore, they are competing with children across the globe. Are you preparing your child for the global scene? Are you exposing your child to quality education that will increase his/her opportunities? Are you creating the opportunity for him/her to establish the right relationships?
This article was originally published on Damilola Alonge’s Medium Page