Education Fund and Inflation

How does inflation affect your savings for your child's education?

Assume that you wish to save $100,000 for the tertiary education of your child in 20 years time.

If you expect to earn an average return to be 5% a year, you need to save $3,020 a year.

In 20 years time, the cost of education would have increased, due to inflation. At inflation of 2%, the cost would have increased to $148,000, or an increase of 48%.

To get the higher sum of $148,000, you will need to save 48% more, or $4,470. That is a lot of money, especially at the earlier years, when your income is still at a more modest level (i.e. has not reached the peak for your career).

A better approach is to have a saving plan that increases with your salary. If you assume that your saving can increase by 2% per year, you can save a smaller sum of $3,720 during the first year and increase your saving by 2% a year to reach the same target.

Lesson: It is important that you get a high rate of return from your savings. Invest in a low cost equity fund to earn 5% per annum over 20 years. (This is not guaranteed, but it is likely to give a higher return than an Education policy).

Read this FAQ:
http://www.tankinlian.com/faq/child.html