I know how sobering and exhausting parenthood is. But the reality is that our children’s future depends on us as parents. Because we know that the first years truly last forever. – Rob Reiner
By Elizabeth Nkukuu
It is the dream of every parent to give their children the very best in life. The thought that they might get to a point where they are not able to provide for them creates shivers to most. It is for this reason that one should ensure they have clearly defined what exactly they would want to offer their kids and what is required if they are to achieve that. Kids demand change with time and age and it is for this reason that one needs to plan and invest accordingly. One of the largest expenses that parents face and yet determine the kid’s future is education and so that needs to be fully planned for and taken care of well in advance.
Let us focus on education as a start, given that there are many investments and insurance products focused on education, the question is always how do we determine which education policy do we take. There is a difference between the insurance led policies and the investment led policies and one should make the decision depending on what is the overall objective.
If one is looking at quickly multiplying the money they have and can take on more risks than they should take up an investment product and if they want protection, they should take an insurance-led policy. In reality the two play a role and should not be ignored at all.
Below are some of the key considerations when one is deciding what path to take:
i. The Time horizon: Time determines where one can invest and hence how much they can benefit from the power of compounding. The longer the time horizon the riskier investments that one can take. The time horizon is dictated by both the age of the kid and that of the parent as well. It is advisable to match the cash flows from the investments with cash requirements for the education;
Image courtesy: Lumen Learning
ii. Available amounts to invest: if one has some lump sum to invest the options are very different from if they have to generate the cash over time. With lump sums investments in secure assets is possible and one can be able to negotiate better returns but if one is growing the net over time, selecting the right product that allows for this is key;
iii. The Risk and Returns: Different products have different returns expectations, for most insurance products the returns would be lower since one is buying certainty or protection but in investments depending on the ability to select the right investments one can command much higher returns. There is usually a direct relationship between the risk and the return and one needs to understand where they stand with each of this;
iv. Financial sophistication: One should only invest in that which they understand. Depending on how familiar one is with various products it can determine what products to take. One should be able to question basic things like how are my returns being generated and what can go wrong. With the many available learning resources on matters investments then one should be ready to invest time and seek the information.
v. Available products in the market: Before committing to any of the investments, and since the kids’ education is not a short-term goal, one should spend time looking at the various alternatives so that they ensure they are getting the very best on a risk adjusted basis.
Key things to consider before investing for your kids’ future:
i. Sufficient diversification: Make sure to balance between concentration risk and over diversification. The diversification should be by product i.e. invest in different products and by providers so that you are getting the best across board.
ii. Read the contracts between the lines: Many at times we tie ourselves on matters that otherwise we would not have, had we been a little bit keener. If you are not confident with contract law, ask a lawyer or an investment advisor to read and point out things that you might need to pay attention to.
iii. Create review periods: It is important that one deliberates creates opportunities to stop and take stock of what is going on. Annual review of the portfolios is good and if something major happens to us we need to relook at our investments progress and portfolio and adjust accordingly.
iv. Start early and do the investments consistently. In investments the magic is in time and the earlier we plan for this the better it is for all of us.
v. Use professionals: Just like other major things in life like health it is always good to speak to people who specialize in matters of investments and together you should create a portfolio that is able to achieve your overall investment objectives.
We cannot gamble with our kids’ future and as Barack Obama said “We know that education is everything to our children’s future. We know that they will no longer just compete for good jobs with children from Indiana, but children from India and China and all over the world “ let us invest for them today so as to prepare them to compete in the global village.
About Elizabeth Nkukuu
Elizabeth Nkukuu, CFA, a passionate investment professional with a mission to level the playing field, enable people and businesses make sound investment choices and expand their wealth building opportunities. She has over 15 years of experience gained by working with top fund management companies in Kenya among them Cytonn Investments, Britam Asset Managers, GenAfrica and PineBridge Investments. She is also a mother of 3 adorable children.
Featured image: Family Education