Expecting a baby? Why preparing your child with ONLY a savings plan is not enough

Like every new parent out there… (or if you’re planning to have one), you might be wondering what you can do to provide a comfortable life for your child.

And as you already know, raising a child can be expensive and it’s crazy how a small human being can cost so much.

From labour, infant to toddler years, primary to tertiary education, it all requires a whole lot of money.

And as long as you don’t cut the financial umbilical cord, the potential costs are endless!

The experience of raising a child is priceless. You can’t put a price on this meaningful and rewarding journey of being parents.

However, according to NUS economists in 2018*, depending on household income, the cost of raising a child in Singapore is estimated to be between $280,000 and $640,000. These figures are inclusive of any direct subsidies from the government.

If adjusted for inflation since 2018 (assuming the annual inflation rate to be 2%), the figures are about $300,000 - $690,000 in 2022!

How financially realistic would it be to save this amount of money for your child’s life milestones in about 20 years’ time?

Today, we are sharing with you some financial hacks on how you can prepare for your child’s future realistically without having to scrimp and save down to your last penny.

At The Money Folks, we help our clients invest and build multiple income streams that potentially enable them to retire with more than $1 million. Reach out to us for a financial assessment call (by application approval only).

Disclaimer: This post represents our personal views and opinions and is neither associated with any organisation nor reflect the position of any organisation. This content is also only for informative purposes and should not be construed as financial advice. Past performance does not necessarily equate to future performance. Please seek advice from a Financial Adviser Representative before making any investment decisions.

Are your savings/endowment plans enough for your child’s university education?

We are sure you are aware of the potential costs of raising a child. But what is your preparation for welcoming a child into the world, in terms of financials?

And as parents, you would want your child to receive the best form of education and experience growing up.

Typically, our elders might suggest saving as much as we could by creating savings accounts for them – the mindset is usually this: “the more you save, the better”.

And maybe some of you are already ‘saving’ the money in endowment plans, so the money will grow over time.

But is the outcome enough to financially aid your child’s milestones?

Let’s do some simple calculations to see how much can an endowment plan aid you in the future.

• Assuming an endowment plan earns 3% p.a. for 10 years. You contribute $500/month up until maturity. This is a hypothetical rate that is similar to some endowment plans’ rates available here in Singapore.
• The average tuition fee for the Year 2022/23 intake for a three-year course at the National University of Singapore (NUS) is $38,226.92.
• Assuming your child stays in the student hostel for three years, based on NUS cost of living estimates, their total would be around $31,200.
• Hence, the total university costs would be around $69,427. Let’s round it up to $70,000.

And if $70,000 is a realistic budget for university costs in 2022, in 10 years’ time, if assuming an annual inflation rate of 2%, it might be around $84,000.

And assuming you contribute $500/month for 10 years and the endowment plan grows 3% consistently (as there are guaranteed and non-guaranteed returns applicable for endowment plans), you could potentially get approximately $70,000 in 10 years.

Although the risks of putting your savings in endowment plans are generally lower compared to investing in stocks or unit trusts, the potential returns would potentially be lower as well.

While this is a substantial amount of money that is able to aid you financially, would it be enough to cover your child’s entire university costs? You might still need to cover the difference from your own savings or other sources of income.

Based on the example above, the difference is about $14,000.

If you plan to send them overseas for tertiary education, such as to the US or Europe, the costs could be much higher.

That said, how about your own financial goals?

Let’s not put your own financial goals out of the equation. Do remember that the breadwinners of the family are very important – as it is your income that keeps your whole family grounded and comfortable.

If you might want to have a career switch or even retire early, planning for your child’s education should not prevent you from achieving your goals as well.

How can you potentially achieve financial independence yet care for a child? Check out these financial hacks:

1. Know how to make use of Child Development Account grants

Many of you who are parents or parents-to-be might already know this: Every child born from 24th March 2016 will receive up to a $3,000 grant in their Child Development Account (CDA) – this is also known as the CDA First Step Grant.

On top of that, the government will also match any amount deposited into the account (up to $15,000 depending on the child’s birth order). It’s a dollar-for-dollar contribution.

So if you deposited $2,000 into the account, the government will deposit another $2,000 in the account!

You can refer here for more detailed information on this support.

And it does not stop there.

Any unspent balance in the CDA account will be transferred to their Post-Secondary School Account (PSEA) to help save for their tertiary education – the balance can be used to pay for approved programmes at approved institutions in Singapore. It can also be utilised to repay any government education loans and financial schemes.

Eventually, any unspent balance in their PSEA will then be transferred to their CPF Ordinary Account when they turn 31 years old. Subsequently, your child will have a head start in accumulating wealth.

So from an ‘investment’ point of view, you (or rather, your child) can potentially get high returns with minimal risk.

Regardless of whether you intend to spend the money in the account or just let it grow, this is a good tool to make use of to start your child’s financial planning journey.

2. Instead of depending on only your day job, grow multiple sources of income

Speaking of investment vehicles, as we have established above, you have to grow your wealth to prepare for your child’s life ahead.

Since raising a child may potentially cost about $350,000 and more, you might want to expand your income sources beyond your day job.

This is so that you don’t rely on only your full-time job salary for income. Let’s take heed of how the pandemic severely affected the economy. Many have lost their jobs or suffered pay cuts during the period.

On top of that, the core inflation rates are projected to be 2.5%-3.5% in 2022 (as of April 2022).

Can one source of income help you manage through this? It is very helpful to diversify in your source of income.

Just like in investments, it is risky to put all your eggs in one basket.

Therefore, having multiple income streams can potentially help you grow your wealth and protect your purchasing power for decades to come.

For example, with $500/month, you can consider diversifying your income sources through multiple income-generating assets.

These are just examples of investment vehicles that you may invest in. These are not in any way investment advice. Please consult a Financial Adviser Representative if you need any professional advice in investments.

These are some assets that you can dive into so you can diversify your income source and potentially grow your wealth at the same time.

And if you are keen, The Money Folks team has helped many of our clients establish multiple income streams using our recession-resilient investment framework.

With careful consideration for your goals, risk appetite and current financial capacity (earnings and debt obligations), we help you allocate your wealth accordingly. This includes the type of industries you invest in such as technology, energy, health care and many more.

When your investment portfolio is planned and managed properly, the example below illustrates what could happen if you consistently earn 10% p.a. potential returns from 35 to 65 years old.

So if you want to have a firm financial footing when welcoming your baby into the world, we invite you to strategically grow your wealth so you can have enough for your child’s education and any expenses along the way.

Most of our team members are recognised as the top 5% of financial advisor representatives worldwide, and many of our clients are on track to potentially achieve their retirement goals 10-15 years earlier than planned.

*Ask: NUS Economists (Sep 2018), How to nudge couples to have more kids