Education Investment Plans are versatile investment avenues that cater for clients of varying risk appetites. However, to save for education one does not have to use a purely education-oriented product.
Other ways of saving for education other than Education Investment Plans include:
Money Market Fund: A money market fund is a short-term investment vehicle that offers high liquidity, as the lock-in period is usually short and withdrawal is easy (most money market funds typically allow redemption within four working days). There are, however, no tax benefits associated with money market funds, nevertheless the higher rates of returns more than compensate for the lack of tax benefits.
Additionally, money market funds offer easy withdrawal that allows you to redeem regularly say, every term or semester or to cover educational emergencies that may arise in the course of the investment period. Nonetheless, a specialized education based unit trust fund would likely limit withdrawals.
Banks: Many banks in Kenya offer targeted savings account for saving for various goals including education. These accounts have seen a high uptake as many Kenyans consider banks to be safe options and fail to pay enough attention to the returns they get.
To illustrate the different returns one would get under various alternatives we have assumed a person who starts with an initial investment of Kshs 10,000 and makes monthly top-ups of Kshs 5,000 saves in a money market fund, with an insurance company and in a bank savings account. Below are the amounts at maturity they would get:
Evidently, the returns from saving in a money market fund are the highest. At the end of seven years, saving in a money market fund will give returns of Sh581, 877 compared to Sh 512, 893 and Sh484, 066 when saving in an insurance education policy and in a bank savings account. A savings account should not just preserve your capital but it should grow with you and your needs.
It is essential to consult a financial advisor before making any investment decision in order to better understand what you are getting into, before signing any binding agreement.
Despite the economic uncertainties, guardians are still certain that they have to spend on their children’s education to secure them a brighter future. In order to do this, they have to plan their finances accordingly and one of the best avenues for this is in an Educational Investment Plans. Education Investment Plans are not used to safeguard a child’s education only but also, to save for one’s own further education like Masters.
Prominent benefits that an Education Investment Plan brings include:
Shield against capital erosion and inflation pressures – Investing in a plan that offers high yield (higher than yearly inflation rates) enables one to protect their savings from erosion, i.e. what happens when the interest rate your money is earning is less than inflation rate for a given year?
Debt management – An education investment plan may enable you to avoid future loans that your children or dependent will have to pay as they start working such as Higher Education Loans Board (HELB) loans. Upon reaching university, the student will not find himself or herself in a situation where they have to take a loan for their studies, as the education investment plan would cater of that. This avails more cash to the students when they start working as the monthly HELB loan repayment amount may be saved or even invested.
Serves as a contingency measure – With tough economic times affecting your business or job security not assured, a parent can rest assured that they will be able to provide for their dependent’s education should their source of income be affected.
Compound interest benefit – Most Education Investment Plans provided by fund managers earn compound interest which make invested funds grow at a faster rate than simple interest, which is interest calculated only on the principal amount. Assuming an investment with an interest rate of 10%, for five years and an initial investment amount of Sh100,000 with no top ups, with simple interest the amount at maturity would be Sh150,000 while with compound interest the amount would be Sh164,861.
Most education savings plans are insurance-based; we suggest that guardians consider all options available in the market.