Dubai: UAE parents plan their children’s education costs well before they start school, but the cost of schooling and college education is often more than what one can save or plan for before school begins.
So when it comes to spending on school and college tuition, here are seven tips from residents and experts on how to not only save more, but also benefit from investing in specific plans.
"Education for children becomes expensive as they grow, and good university education in the UK, Europe, and the US can go up to Dh200,000 per year, which is why we need to plan well beforehand,” said Arti Vardhan, a Dubai-based Indian mother of two boys, aged 19 and 14.
Savings tip #1: Ensure regularised deposits to saving or investment plans, while factoring in inflation
She and her husband set a regular monthly savings strategy for their planned expenses, while also factoring in forecasted inflationary cost pressures, and this helped ease their stress while the kids grew.
"We have been regularly saving since the children were born, investing in mutual funds and investment plans from companies which provide great platforms like Zurich, Generali and Friends Provident fund," explained Vardhan, who is also an entrepreneur and a partner at an event management firm.
But how did they go about it? "We initially started a long-term plan for 16 years and then took up smaller term plans for eight years and then five years as our savings potential grew and we had more income. We planned the maturity of all these when our son was 16 and ready to go to university.
“The day our son was ready to pursue his studies in medicine in Europe, we were ready with funds for his complete education. We are doing the same for our younger son, who is presently in Year-11."
We have been regularly saving since the children were born, investing in mutual funds and investment plans from companies which provide great platforms like Zurich, Generali and Friends Provident fund.
Savings tip #2: Fund and assess your present needs, re-invest extra funds and make them grow further
After assessing and funding their children’s current needs, Vardhan reinvested (explained below) some of their funds to grow further as the fees and expenses are paid only annually.
So the profits earned is used to purchase additional investments or invest bigger (for larger returns), rather than receiving all the profits and using them after the initial investment term matures.
Reinvestment is often done in businesses that are making profits. About 50 per cent of profits are reinvested to further improve profitability, and eventually improve balance sheet strength. This will increase the value of the business without the commitment of liabilities.
"We have selected secured investments to keep the funds growing. We have invested funds abroad and, on maturity, we put some of them in the banks in UAE to get safe but smaller returns.
“The strategy has always been to mix between secured debt (when the borrower puts up some asset as surety or collateral for the loan) and some high-growth equity funds (fund that invests in stocks) to maintain growth and security," Vardhan added.
They took advice from a seasoned professional financial consultant throughout their journey of investments and savings, which they believe has been rewarding, guiding them to create a proper plan to balance security and growth for their hard-earned money and savings.
The strategy has always been to mix between secured debt and some high-growth stock funds to maintain growth and security.
Savings tip #3: Invest by finding a plan that balances your risk and your need of future security
Dubai-based Pakistan expat Muntazir Haider, a father of two kids, aged three and one year, explained how his savings strategy is to divide the monthly income into four major sections: spending, saving for personal affairs, saving for unforeseen and saving for the kids.
"We adopted an approach to minimise spending without being too conservative, and ensure all the four saving sections are invested in places where there is moderate return – not aggressive, because risk and the need for security should be balanced," said Haider, who is an entrepreneur, consultant and trainer.
"Since our children are young, we have opted for a Bancassurance investment product as our saving option for kids, as it includes a life insurance plan. It provides a commitment of lump sum money to be given to the beneficiary upon maturity. I have invested money in Bancassurance for a relatively long term plan wherein the returns realisation starts (generally) from seventh year onwards, and returns are very decent and secure."
"We have also made real estate investments in the UAE, buying with a mid-term investment vision; booked a few apartments with renowned builders and developers like EMAAR and DAMAC. Upon possession of the apartments, we intend to put them up for rent for a secured running income with the surety of holding up the investment itself through the property. This provides us good income source to fund our children higher education when they grow up."
Although many of Haider's friends and family recommended him to invest in stocks and shares, he decided to not go that route as it can turn to be very risky because he felt he was not equipped with the proper knowledge.
What advice do money experts give parents on how to invest better for children's tuition?
Dubai-based finance and investment experts reiterate how investing early for their child's tuition is crucial as the cost of education, particularly under graduation and post-graduation education, is increasing rapidly.
Savings tip #4: Make the most of compounding on long-term educational investments
"By starting early, even if it is in small amounts, parents can maximise the benefit from the power of compounding interest rates,” said Sridhar Iyer, executive vice president and head of NEO (Digital Bank) and liability products at UAE-based privatised lender Mashreq.
Suppose, you invest Dh1,000 in a bank which offers 10 per cent interest per annum. Your investment becomes Dh1,100 after the first year, which becomes the basis on which interest is calculated for the second year.
So instead of it becoming Dh1,200 (double of Dh1,100), it becomes Dh1,210 after the second year, and the seemingly small additional interest amounts keep getting compounded with time, and will eventually lead to a bigger amount, which is why it is called the ‘power of compounding’.
Each time you earn interest on your initial amount, it is added to the original, which then becomes the starting amount for the next interest calculation cycle. This allows exponential growth for your interest.
“Make a habit to save regularly and have monthly savings targets. Maintain regular savings to achieve monthly goals; this not only increases the savings amount but also teaches discipline for regular savings," Iyer added.
Savings tip #5: Seek plans with a long-term investment horizon and structured monthly instalments
Parents in the UAE can consider opting for an education plan from the Dubai government’s National Bonds, a Sharia-compliant savings and investment firm wholly-owned by the Investment Corporation of Dubai, the investment arm of the Dubai government, Iyer opined.
"The plan offers a long term investment horizon with structured monthly instalments that are easy to meet. The plan also offers annual profits and an additional incremental bonus based on the holder's accumulative average contribution."
Another option Iyer recommended is a systematic investment plan (SIP or automated regularised monthly deposits) of investing in fixed deposits or ETFs. However, Iyer cautioned parents to ensure that the company they invest in is regulated by the Central Bank of the UAE, the Abu Dhabi Global Market or the Dubai International Financial Centre.
Iyer added that child life insurance is also a prudent investment and insurance plan that builds an amount while providing life coverage. In short, it creates an investment amount to meet expenses at a future date.
Savings tip #6: Know whether to purely invest or to purchase an additional insurance cover as well
“Some plans offer pure investment,” said Basit Saiyed, regional head of wealth and liabilities, wealth and personal banking at HSBC.
“Others combine an insurance wrapper with the investment component to protect against any eventuality of loss of life, disability or loss of income. You must ensure the product you select offers flexibility and portability as you should be able to take your investments anywhere else in the world.
“With something as medium to long term as investing for a child's future, you want to ensure that the product is as flexible as possible with no to low penalties for stopping and starting, no new charges to increases or decreases in investment amounts and a wide range of investment options.”
Saiyed suggested some of the essential questions one should consider before investing are:
1. What are your financial assets, liabilities, income and expenses?
2. What is the total amount that you want to accumulate?
3. What is your attitude towards risk?
4. How much can you put away today towards the goal of child/children's education?
5. Can you put money aside periodically or ad hoc lump sum injections?
Circumstances could change, so review your financial plan periodically, once a year at the minimum, and make course corrections as needed, Saiyed said.
Savings tip #6: Comprise your educational investment portfolio of stocks, bonds over a 10-plus period
"As parents, one cannot know what expenses will be required for your children,” said UAE finance coach and chartered accountant Carol Glynn.
“Education is a common savings goal, but how can you know how much will be required? In some countries, education is always paid for by parents; in other locations, governmental support means the cost of education is less."
People generally are very mobile now than before, so parents cannot be sure where their children will be educated, which applies from preschool or kindergarten right up to third-level education, she added.
"My advice would be to save as much as you can afford and research how much you will need as your children get older and you have more information available. I believe a balanced portfolio of stocks and bonds over a 10-plus period would be a wise way to save for your children's educational expenses. It is also a great way to generate generational wealth."
Savings tip #7: Understand whether to pick an onshore or offshore educational investment plan
In the UAE, parents can pick onshore and offshore solutions to safeguard their children's future.
One needs to identify the main difference between these two products is the jurisdiction of the product, noted Khetra Reddy, senior wealth architect at Dubai-based Elixir Wealth Solutions.
"Onshore products will work under regulations and framework of the resident country. On the other hand, the offshore product will not fall under the regulation of the resident country."
Reddy’s advice to parents is to perform the following checks before enrolling with any company:
1. Whether the product is onshore or offshore?
2. Where is the money being invested by the product provider?
3. What is the rating or the popularity of the product provider?
4. How transparent are the features of the product?
5. What is the risk associated with the product?
6. Will someone has to manage the plan, or it's self-managed?
7. How the proceedings will be passed on to their children in case something happens to the parents?
8. What are the experience of the parents who are holding the same or similar kind of product?
• Generation insurance plan wherein a grandparent can purchase it for their grandson or daughter
• Plans wherein you have capital protection and guaranteed return
• Plans to participate in the equity or stock market with the protection of your money or capital
• Several critical illness insurance claim plans are available in case parents want to secure their child's finances through insurance when they are young.