The days are long but the years are short – so the saying goes about enjoying your time with your children while they are young. Experienced parents can attest to how fast time flies. Blink, and suddenly your cute toddler is in primary school. Blink again, and they’re blossoming teenagers. But before you find them browsing through university course catalogues, you will be in a better position if you spend a moment to strategise a savings and investment plan to finance their college fees now. 

There are many compelling reasons why young parents should begin investing early. Firstly, local tertiary education is at least S$30,000 for a four-year course in today’s dollars according to Yahoo. And according to The Straits Times, sending your child to an Australian or British university costs at least S$60,000 per year, which would amount to a minimum S$180,000 for a three-year course. Saving early gives you a good head start to funding their hefty tuition fees, and investing early gets your money to work harder for you.

Secondly, the more years you have to grow your money, the more your investments get to leverage the power of compounding over time. Compound interest is when you earn interest on not just your principal amount but also your interest, which helps the growth of your savings to accelerate as the years go by.

Thirdly, by investing in assets that give you higher returns, you can beat inflation–a factor that will certainly come into play when planning your child’s tertiary education in 10 to 15 years’ time.  

What are some instruments you can use to build your child’s nest egg early? Here are five popular choices among young parents.

1. Savings and fixed deposit accounts

Saving accounts are bank accounts that give you higher interest rates compared to current accounts which you use for everyday transactions. Fixed deposit accounts are similar in that you deposit money at a predetermined interest rate for a fixed amount of time. 

In Singapore, both accounts are protected by the government’s Deposit Insurance Scheme, for up to $100,000 per depositor, making them low-risk options with guaranteed returns. The downside is that the returns are relatively low. Nonetheless, they are suitable if you prefer lower risks and feel more assured knowing that the funds are accessible in case you need it for emergencies. 

2. Singapore Government Securities bonds

Government bonds are an investment product where you lend money to the government at a certain interest rate for a predetermined amount of time. For Singapore Government Securities (SGS) bonds, the tenors ranges from 2 to 30 years. 

Like savings accounts and fixed deposits, these are low-risk investments as SGS bonds are backed by the government and there is certainty around your yields at point of purchase. Moreover, SGS bonds can be bought through a variety of ways such as using cash, CPF as well as through the CPF Education Loan Scheme. However, should you need to exit or sell the bonds before maturity, its price may rise or fall depending on the prevailing market.

3. Index funds ETFs

An exchange-traded fund (ETF) is a basket of securities that trades on a stock exchange, just like individual company stocks do. Index ETFs are a specific type of ETF that are designed to track stock indexes such as the Straits Times Index, S&P 500, the Dow Jones Industrial Average etc. This means that the basket of stocks in the ETF is a representation of stocks that make up, for example, the Straits Times Index. 

Index ETFs are a suitable option if you have higher risk appetite, as your profits are not guaranteed. Unlike individual stocks, index funds allow you to diversify by holding a basket of stocks that reflect its target indexes. Also, while ETFs typically have lower management fees compared to mutual funds (more on that next), you have to manage your purchases or sales yourself via your chosen brokerages which may incur transaction fees.

4. Mutual funds

Mutual funds are very much alike to ETFs in that they allow you to diversify your investments by offering a wider mix of investment choices from asset classes to the types of investment objectives. A key difference is that mutual funds are professionally managed by fund managers. Also, mutual funds may not track indexes and are not listed on exchanges. You can only buy and sell them directly with fund companies or intermediaries.

Given the wide investment choices, investing in mutual funds suits you if you want more control and flexibility over your investments. This also means that you would need to spend more time to better understand the risks and returns of the different funds, strategies, underlying assets, etc. And due to the involvement of professional managers, the fees for mutual funds are typically higher compared to ETFs.

5. Endowment insurance plans

Young parents who want to “kill two birds with one stone” might fancy endowment insurance plans, which combine protection and savings and offer a lump sum payout at the end of the policy term or upon death of the life insured, whichever happens first.

Generally speaking, there are two types of endowment insurance plans: participating and non-participating plans. Participating endowment plans allow you to share in the profit of the insurance company’s participating fund in the form of bonuses or dividends that are not guaranteed, as they depend on the performance of the participating fund. Non-participating endowment plans on the other hand, do not take part in the performance of the insurance company’s participating funds, but you’ll enjoy guaranteed maturity returns which are often made known at the start.

Besides providing you with a savings element, endowment insurance plans also provide you with protection in the event of death during the policy term. This can be part of your legacy planning where you can feel assured that your children will always have money set aside for their education needs.

Start your nest egg today

The most important part about planning for your children’s education is starting early. When your investment horizon is longer, you can afford to take more risks and enjoy potentially higher returns. Also, while your family is young and your dependents are more reliant on you, consider getting strong financial protection so that your family will be well taken care of in all circumstances.

No matter what you decide, take the first step without delay today – you will be thankful for your decision in years to come.