When there’s only “number one” to look out for, it’s so easy to leave investing for the future at the bottom of your to-do list. But priorities can shift quickly - and, of course, nothing quite changes your point of view quite like the arrival of the next generation. From then on in, it’s not just financial planning that you have consider, but family financial planning. And that deserves serious thought.
You have an end goal - and you need a certain amount of resources to ensure that goal is fulfilled.
Take retirement planning, for instance. Most people have at least some kind of vision of what they want to do when they retire, and can plan accordingly. Children, on the other hand, are a whole other ball game. Who knows what they’re going to do? Who knows what support they’ll need? From early education right through to high school, university, internships and starting out on a career path, most of us want to be in a position to offer a helping hand where needed. It is essential to bear the resources to accommodate this - no matter what path our children decide to embark on.
Let’s explore why this area should not be left to chance.
Think of a number. Now multiply it by four. US-based Care.com’s recent Cost of Care Survey suggests that the first year of a baby’s life costs four times what the average parent expects (up to USD52,000).
Evidence also points to the fact that child rearing is getting more expensive. The UK Centre for Economics puts the typical projected cost of raising a child born in 2016 at around GBP231,000 (USD313,409); a 65% increase since 2003. If the child attends boarding school, the figure soars to just short of GBP500,000 (USD678,275).
So remember; children are probably more expensive than you think!
As a parent, conversation topics at the dinner table expand into an entire new domain. Regardless of where you’re based, one reality is clear: private schools are increasingly expensive.
In the UK, school fees have more than trebled since 1990. Private schools in Dubai were given the go-ahead to raise fees by up to 4.8% this academic year, whilst The Times of India reports that annual increases of 10-15% are pretty much the norm.
You can never quite predict what the taxman has in store. In the UK, for instance, the Labour Party seems set on abolishing private schools’ charitable status - meaning fees would be liable for a VAT charge of up to 20%.
Meanwhile, Which School Advisor raises an interesting point about the UAE’s new 5% VAT charge, due to come into force in January 2018. Although school fees will probably be exempt, the knock-on effect on costs further down the chain may mean that fee rises are inevitable.
This year’s budget in Australia featured a proposed university fees rise of 7.5%. Fees in Singapore have increased by 38% since 2007, and for Canada the figure is 40%. In short; it’s yet another global phenomenon. Ditto for the scaling back of state assistance in favour of student loans - often with eye-watering interest rates.
A few years ago, we saw Hong Kong universities increase fees for non-local students by up to 20%. It’s been a similar story in the UK and elsewhere. Unfortunately for expat families, young people classed as ‘overseas students’ tend to be labelled as cash cows by educational institutions.
For expats in particular, all of this can be doubly challenging. For instance, do you opt for a lycee, a local independent - or send them to your home country to study? Research is of course vital. But here’s the key point: in an ideal world, you want your choices to be dictated by what’s best for your child - not your financial limitations.
The earlier you start planning and saving, the better. For one thing, an early start gives you more time to build your portfolio - and with a lower monthly outlay. It also gives you greater scope to tap into the power of compounding. Longer time horizons allow for a stronger snowballing effect; when your earnings generate even more earnings.
Remember that the clock is ticking. It’s a different situation to retirement planning where you can choose to keep on working until your pot reaches precisely the right size. Once little ones arrive, they have a habit of growing up to a very strict timetable - no matter what.
So, where to start? Ballpark figures provide a useful way in. For this, you might want to take a look at a school fees investment calculator, such as these examples from Prudential (UK) and Zurich (UAE).
How much is enough? If you are saving to send your child to a UK university, here’s a snapshot of how property investment could support your goals:
The cost of sending your child to a UK university for their undergraduate degree is significant. Living costs vary by location and lifestyle, but average around GBP 13,500 per year. Tuition fees are currently GBP 9,250 for Home / EU students and range from GBP 10,000 to GBP 30,000 for international students depending on the subject studied. This does not take inflation or future currency volatility into consideration.
|Home/ EU students
||International student - lower end tuition fee
||International student - higher end tuition fee
|Living costs, annual||GBP13,500||GBP13,500||GBP13,500|
|Tuition fees, annual||GBP9,250||GBP10,000||GBP30,000|
|Total costs for a three-year undergraduate degree course||GBP68,250||GBP70,500||GBP130,500|
|Property price at sale||You deposit upon reservation (~15%)
||You deposit upon completion (~20%)
||You borrow (at 65% LTV)
||You pay each month (4% interest rate *, for 25 years)||Rent you receive each month||Gross Yield||Value in 10 years (~5% growth per annum)||Capital Gains after 10 years|
* Subject to individual status and market conditions
Below, we’ve also put together a three-stage broad approach for building up funds. These relate to a child who you anticipate will be attending a fee paying school from the age of 11 - and university at 18. (NOTE: this is for illustrative purposes only and is not to be regarded as financial advice.)
Stage one: (0-7 years) Capital growth. Here, you are building a strong cash base for security. At the same time, because you have started your investment process at an early stage, you have scope to put a high proportion (as much as 80%) in growth assets. Think here in terms of a diverse portfolio of equities/funds and a start on the investment property ladder.
Stage two: (7-13 years) Transition. Once you have narrowed down your schooling options, you will have a better idea of likely outlay. So you need to rebalance your portfolio in order to provide enough liquidity to cover those fees, while leaving the bulk of capital intact. Having property within the portfolio can prove highly useful here. In particular, rental income can be put to work to start supporting your educational costs.
Stage 3: Capital Protection: (14-18 years) There’s now minimal need for risk (you can save that for your longer term investment plans to fund other goals, which should be regarded as separate from this planning strategy). This might be the time to realise the sale of an investment property, and certainly to shift enough money out of illiquid assets ready to meet the costs of university. Timetabling is important. For instance, you might want to consider a series of funds that mature before college starts. That said, especially where returns are non-fixed, beware of leaving it to the very last minute for funds to mature - as predictions and reality can often differ considerably.
This 3-stage plan makes multiple references to investment property. The reason for this is simple: this is an asset class that has the potential to play an important and valuable role at each stage of that plan.
It can offer you capital growth and regular, predictable income. This is precisely the combination of characteristics that makes property such a valuable “working” asset. Let’s say you have multiple investment properties within the portfolio. In practical terms, you could use the rental profits to help pay for school fees, while going on to realise some of the capital to fund university later on.
It’s a perfect tool for diversifying any portfolio. Take a look at Richard Bradstock’s examination of why this is so important.
It can outperform other asset classes. Research combined with the right advice is all important. But get it right and you can not only outperform the market, but also add an extra layer of protection to your portfolio.
Cash-based investments provide a very low return. A perceived absence of risk means cash is often the go-to investment for children. But are you selling your children short by playing it too safe?
Buy-to-let for your child. This is a further, potentially attractive model for contributing to the cost of your child’s education (i.e. buying them a student flat). Instead of student accommodation costs being an outlay, it effectively becomes an investment in itself. But beware: it’s best to only do this if there’s a strong investment case behind it - otherwise you could be saddling yourself with a liability, not an asset.
It can be put to practical use. You realise there’s a very good chance that at least one of your children will find themselves working in a major hub (e.g. London) on a year out/internship/further study. It just so happens that right now, there’s a strong investment case for properties within outer London areas that are reaping the benefits of recently bolstered transport links. It’s perfectly reasonable to factor in this practical possibility when choosing where to buy. The upshot? You’ve got a strong investment in its own right along with somewhere you are happy for them to live.
It’s a true ‘family asset’. It’s yet another global phenomenon: bricks and mortar are something to treasure. Let’s say you have a portfolio of dividend-producing blue chip stocks alongside a strong property portfolio. The end result is a legacy capable of offering a layer of protection to your loved ones - way into the future.
Shelley's experience spans more than three decades in investment advisory. Shelley's main focus is property, working with high net worth and affluent investors who are interested in accessing the UK property market and indeed further afield with a global reach to USA, Germany and Australia.
Article originally published by IP Global, 17th October 2017