Monday, July 7, 2014

What should I do with the savings for my child?

There's been a couple of bloggers out there who have posted on what they would do to help their parents invest their money.
I've been thinking over the past few weeks on what I should do with the angpao savings my son received from families and friends during his birth and the 1st month baby shower. The savings amounted to around S$6,200 for now and the objective is to pay for his college and university school fees when he matures later.
There are a couple of choice which has been lingering on my mind. The one thing certain is he has a longer time horizon (around 20 years) and the argument is he can stomach more risky investment. Still, I am not sure if that is going to be the best option.
Option 1
I was planning to open up a junior savings account for him. My idea was to put in these sum of money on the savings account and we have the flexibility to take out as and when it might be required (sort of acting as a secondary emergency fund). However, it appears that this move may be unwise given the rate of inflation that would eat up the sum of money in 20 years time.
+ : More Flexibility, Act as a secondary emergency fund
- : Inflation
Option 2
The second option is involving endowment plan under an insurance plan. This is a rather good option which gives me the rate of return required and also higher than the normal savings account. However, I am not sure if this is the best option as first of all it doesn't give me the flexibility to either stop or withdraw the premium and secondly, I might already have something like this plan in the form of my life insurance plan (where after 15 years and I no longer want to be covered for life, I can withdraw the money and breakeven, SHOULD I really need the money)
+ : Returns are better than fd and safe from recession
- : Less flexibility
Option 3
The third option is to invest in stocks which will compound over time after 20 years. Stocks is a risky instrument in general and hence I might be looking more into defensive stocks that yield good returns over the past couple of years, proven. Stocks such as ST Engineering or Singtel are what I have in my mind.
+ : Higher returns
- : May be subject to recessions and volatility


Whay do you think? Are there any other options which might be suitable?

40 comments:

  1. It depends on the amount you have. If every year it is going to be around $6K, then you can buy an education endowment plan (around $3K) for a local U. Then the rest you can either invest in shares or UT.

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    Replies
    1. Hi anonymous

      Thanks for your suggestion.

      I do think about splitting up the two accounts but because the amount is relatively small I have doubts whether it would be effective.

      Furthermore angbao money is relatively fluctuating year by year so we'll never know whether we will get more or less.

      Delete
  2. Hi,

    My son is 9 mths old now and ive bought one endowment plan and one life insurance for him.

    Endowment for hia future university fees, though not a lot, but a base.

    Life insurance is for him to take over when he's old enough and started working. This is a 10 year limited premium payment plan including early CI and a future premium waiver rider. So, my son will not have to pay anything at all when it's transferred to him and his sum assured will increase over time when the insurance company declares bonus.

    For his spare cash, I parked them with my higher yielding deposits like ocbc360, dbs multiplier and scb bonussaver and give him all the interest income.

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    1. Hi naro

      It seems like you are all well prepared for your child financial needs ;)

      May I ask how much did you put for the endowment plan for your child and how many years did you choose for maturity?

      Also any reason why you chose not to invest the rest of the spare cash? I would assume that these sum of money is just sitting in the bank doing nothing.

      Delete
    2. Hi,

      I came from a family with strong insurance background and starting early is important, especially for university funds. Actually, its more important to insure my wife and myself, so we increased our coverage through term insurance. We're covered for at least $1mil each through combination of life insurance, term insurance and endowments.

      For my son's endowment plan, the premium $300/mth for 5 years if i didn't remember wrongly (could be 10 years) and mature when my son is 25 years. For girls, one may want to choose maturity at 21 years of age.

      I am not confident of my own investment techniques, hence, did not invest my son's spare cash. Those higher yielding deposits at ~2% and above is pretty decent, so just park his savings there first.

      Wait till I'm more confident of my own investment techniques, then I'll consider using my son's savings to invest.

      Anyway, just to add, I also bought private integrated shield plan for my son. Didn't really have to fork out any cash during his recent hospitalization which came up to about $7k. In fact, we received additional cash from the additional riders we bought on top of the shield plan. I feel this is more important than anything else for children, especially, when they are so young and don't know how to communicate their symptoms.

      Best regards,
      naro

      Delete
    3. Hi Naro

      Thanks for your reply.

      I have a life insurance insured against myself of $500k and I already have to pay around $543 per month. It appears that a lot of your active income goes into paying off for the whole life insurance. At least, you got your mind off from there should anything happen to you couple (touch wood)

      Delete
  3. Hi B,

    Your baby should have an even longer horizon than you, so why not stocks if it's for returns? After all, you are managing your own portfolio actively.

    However, if it's meant more towards diversification, then bonds and deposits could make more sense.

    My 2 cents worth. =p

    ReplyDelete
    Replies
    1. Ho 15hww

      On first thought, the child may look like he is having a longer horizon than myself. However my worries remain what if in the year we needed the money a recession comes and wipe out the value of the stock? Wouldnt that be disaster?

      I understand where you are coming from though :)

      Delete
  4. When they reached upper secondary; they refused to handover their ang pow money for me to invest.

    LOL!

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    Replies
    1. Hi Uncle Cw

      I did that too ;)

      The impression I got when I was a kid is whatever angbao I gave to my parents become part of their money. But still I knew they would fund my education. So no complaints for that.

      Delete
  5. B,

    What did your wife say?

    ;)


    If you haven't consulted her, time to get 2 beer bottle caps and kneel on your knees. What were you thinking!?

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    1. Hi SMOL

      My wife isnt too money savy so she usually trust on what I was doing.

      However at times it is always good to have a risk checker in place so she would question me like "What if.....". I love that.

      Delete
    2. B,

      I think you have read about some forum writers worrying whether their grown children or wife can handle the investments when the writer is no longer around...

      Now imagine 5 "well meaning" relatives and salesmen all giving their "best interest" advice to your wife when you not around ;)

      Consult - respect and love

      Share your reasons for the final decision - involve and since joint decision as parents, speak in one voice towards the child.

      Hey! You had your heart's intention backup in your wife's heart :)

      Delete
    3. Hi SMOL

      Caught your well thoughts.

      You are right. The idea is to consult as partners regardless whether it will be a good decision or not at the later stage as long as the decision is made together.

      Ive been also slowly explaining the moves I made for my portfolio of assets so that she can make a good decision should I be not around ;)

      Delete
  6. Some time back, I also went through this journey. Initially, opened up a savings account to drop in monthly contributions. Realised later it wasn't going to reach the target. Finally made some adjustments with proper planning in terms of the number of years. Now using a unit trust RSP approach with a diversified portfolio with an equity and bond/cash components.

    It's been a few years since my post on this. On track and almost reached my target of $80,000 each for each of my two kid.

    http://lizardorealm.blogspot.sg/2010/08/misadventure-of-education-savings-funds.html

    BTW, on whether can stomache the market heaves, it's a question of whether you (or I) can withstand it, not the kids. 8)

    ReplyDelete
    Replies
    1. Hi Lizardo

      Thank you very much for sharing on your experience.

      Just like I thought, the savings acccount are perpetually the worst option out of the three.

      The endowment option is decent. Even notwithstanding the life protection, they still yield a decent 3% per annum. On top of that, they ensure stability discipline and recession proof returns.

      I would agree with you that unit trust or stock might be a good option to go for the long term, the question is the recession might just come in at the time when we needed those money.

      Nevertheless I still read your experience with much needed thoughts. Thanks for sharing!! ;)

      Delete
    2. Hi Lizardo,

      I'm inspired by your experience!

      Mind if I ask how much is set aside for the RSP and over how long?

      Other than the RSP, any other forms of investment for your kids?

      Best regards,
      naro

      Delete
    3. B, Naro,

      To expand further, the UTs I invested into the portfolios for my kids' education fund was divided into 70% equities (diversified across different regions) and 30% in bonds/cash/money-mkt funds.

      As explained in my post (indicated in above), I started with $7,000 for each kid with 8 more years before they would enter University. My monthly RSP was started at $300. Subsequently, as my salary increased over the years, the RSP was gradually increased to $600. Over the past 5 years, their portfolios have since grown to ~$70,000, of which ~17% came from unrealised profits. There were also other top-ups that took place occasionally.

      Hope that helps.

      Delete
  7. For our style we used a combination of your 3 options. The moment our kid was born, we opened a child savings account and signed him up for an education plan (the bare minimum one). Then we made a monthly contribution to the account.

    A few years later, after the account balance became substantial, we took out $X amount for investment, leaving $Y in the bank. Both of us then agreed that the $Y would be the threshold, acting like a cash buffer.

    Thus we continued our contribution to the account, and every half year we would take out the surplus above $Y, and put it in dividend yielding counters, and let it grow.

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    1. Hi Anonymous

      Thanks for sharing on your experience. I think all the 3 options you have provenly used are decent instruments - it just need to be used at the right moment.

      A cash buffer is also very important in such stages.

      Delete
  8. Stock investing is an extremely valuable skill, try not to waste it. You are worried about the market crash, no one will know when or what kind of returns we will be getting for the next few years, even the best money manager cannot guarantee what kind of returns you will be getting in the next few years, but for 20 years, you are most likely to encounter a full cycle of bulls and bears, and as you are investing for your child for 20 years, most probably a 5-8% cagr can be satisfactory. If you think you can achieve that for your own portfolio, you should do it for your child as well. Cheers, Y

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    1. Hi Valueinvestorandlife

      I agree. For 20 years theres probably the bull and the bear somewhere between there involved in the process. The best time to invest is now instead of timing the market. As you said I dont expect too much return out of this. As long as I can get around 5 to 8 percent that would be good enough to sustain.

      Delete
  9. Wishing u all the best! My parents were not money savvy. I was not so lucky as to have an endowment plan set up for my tertiary education fees.. And that's why financially, we are not that strong now with my upcoming uni life. It would really be wise to begin with the end in mind.. Sometimes, the answer will just come naturally..

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    1. Hi Dividends101

      Even though your parents were not savy with money, you emerge stronger as a person eventually no?

      It appears that you are now going to the smu school of business it proves that you are an intelligent person.

      You can make a difference to both your life and your parents.

      Delete
    2. not business, taking law actually haha

      Delete
  10. Any particular reason that the kid is supposedly depending on his/her parents for uni funds? Should you consider teaching your kid to earn this fund instead?

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    1. Hi Eye White Shut

      I'll take the more asian culture in this case by funding for the child education. I understand this can be totally different in other cultures where the children is forced to take school loans to fund their own education.

      Having said that, I will not spoon fed for each and everything that he will do. I will continue to teach him the value of money and so on so that he will be able to operate on himself one day without my need :)

      Delete
    2. With 20 yrs, it is long enough with several market cycles to look for growth-dividend stocks. The future multi-bagger blue chips with high yield on cost.

      Delete
    3. Read? insurance - enhanced endowment policy suck! - Part 2

      I did what most parents will likely to do for their kids. Right?

      Delete
    4. Good read Uncle CW on your experience!!!

      Now everyone needs to go past you first before prompting your children on financial issues.

      Delete
    5. B,

      Child insurance and Education endowment policies are seldom BOUGHT; they are mostly SOLD TO,

      CW has climbed the mountain and sharing his true experiences. This old ginger go kick! Must listen (but verify yourself)!

      Sometimes life don't have to be black and white. Can mix option 1 and 3 together ;)

      As to the optimum % mix, it may depend on your risk profile and whether you have the interest and time to read up more on Portfolio Management.

      You'll be surprised a small % share in bonds/fixed deposit can reduce the volatility of an equity portfolio by how much!

      Delete
    6. Opps! I meant "got kick"; not go kick CW... LOL!

      Delete
  11. Actually its not your money, its your child's money. You are only managing on behalf of your child. So if you invest in government-linked blue chip companies, you should not be worrying about recession and unable to take out the money to help you to tide over. Take a long term view if you are investing for your child.

    Regards,
    SG Wealth Builder
    www.sgwealthbuilder.com

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    Replies
    1. Hi Gerald

      Thanks for your input.

      I agree with you on your thoughts.

      A long term horizon is unbeatable in any scenarios of bull and bear.

      Delete
  12. Hi B,
    1. POSB Invest-Saver? I am really thinking hard on this plan..
    2. Buy Govt bonds?
    Forget about endowment plan - low return and yet long maurity

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    1. Hi Anonymous

      I don't like bonds for a couple of things, most notably because it gives a FIXED payment rate for the next 20 to 30 years without accounting for increase in inflation. The overall ROIC could be very low for bonds. Plus I think that's more suitable for the older people who have a much lesser time horizon to invest.

      Delete
  13. I am also curious how POSB invest-Saver would perform over 20 years as compared to an endowment. Probably higher returns than endowments over the long term. The dividends can act as a channel to buy small gifts for him as he grows up. (then again it can be reinvested for higher returns)

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  14. How is the outcome after so many comments?

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    1. I'll decide to go with option 1 and 3.

      Too little amount to divide all into the 3 options. Might waste resources here and there ;)

      Delete
  15. For me, we actually put the money aside and forgotten all about it! I have recently just parked it in CIMB junior which earn slightly higher interest compared to other banks. It is not a big sum and I am not confident in investing at all.. so that was my choice. Still considering whether we should get education plan from insurance agent.. >_<

    ReplyDelete

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