As you go through the various life stages, you can come to a point where it may be difficult to weigh your financial goals and decide which should get more attention from your limited resources.
Some parents may be torn on which to focus on: building a retirement income, or investing in an education plan. Others may be perplexed by saving, investing or debt reduction options; how does one decide which is more critical?
As the questions mount, it becomes increasingly important to evaluate your options and prioritize your goals.
Identify your priorities
To figure out your financial plans, list down your priorities and calculate how much it will cost to fulfil that goal and the amount of time needed. Remember to account for other information as well, such as the size of your family (eg, another child coming along?), interest rates, inflation (approximately 2 per cent per annum) as well as your earning power over time. Factor in items such as cash in your CPF account or your Child Development Account as well, although it is not advisable to be overly reliant on this amount to tide you over.
After you have identified your financial goals, explore alternatives available to you to help you prioritize your resources. This may not be a simple exercise as competing goals may have different financial benefits (and consequences), levels of urgency and available alternatives.
For example, considering the emphasis on education in Singapore, most parents are likely to prioritise this goal at the expense of others and set aside a larger proportion of their income towards children’s education fund.
About 56 per cent of parents surveyed by OCBC Bank feel that they don’t have enough savings to pay for their children’s university fees, even as they invest in endowments and stocks and shares to assist them in this goal1 , as almost all expect their child to have a tertiary education.
They may feel that it is altruistic to neglect planning for their own retirement, on the assumption that their children will look after them financially upon graduation.
This may not be the correct approach to a holistic financial planning, as there are many variables along the way that can affect the desired outcome.
For instance, as a young working adult, the child may not be able to cope financially with an older parent’s living and medical costs. The child may also face competing priorities, such as providing for a family of their own after marriage.
Therefore, when it comes to the crux, financial planning for your retirement and your child’s education should not be mutually exclusive.
Prioritise your retirement but don’t neglect your responsibility towards your child as well. If it turns out that you have managed to save only half the amount needed for a university education, it is better than nothing.
The sooner you start saving and investing for your child’s education and your retirement, the faster the funds can grow and multiply.
A basic step
Firstly, no matter at which stage of your life you are at, ensure that you have set aside an emergency stash of funds. This account should be separate from the one used for day to day expenses and the funds should not be used for holidays or big-ticket purchases. Build up a buffer for at least six months’ worth of expenses, to serve as a safety net in the event you lose your job, or have a medical emergency.
To ensure you stick to your intent of building this emergency fund, arrange for a specified amount to be automatically withdrawn from your salary and transferred directly into the emergency fund account.
Should you discover that you are having issues meeting this objective, then it is a signal for you to assess if you are living beyond your means, and take steps to correct your spending habit if yes. Cut down on impulse purchases or go on holidays less frequently, until you have sufficient liquidity to buffer you during a financial setback.
Debt reduction should come into play as well.
A key culprit here is credit card debt, which incurs a high interest rate on the amount that is not paid off every month. In 2011, the total number of delinquent debtors - people who pay nothing or less than the minimum sum on their credit card debts - was just over 73,000. It hit more than 101,493 in 2015, according to the Credit Bureau Singapore, with the biggest credit card debt coming up to over a million dollars.
Those affected should stop running up new charges and take quick actions to solve their credit card debt before it snowballs.
Maximize Your Investments
There are affordable options available that can help fulfil both financial goals, so that you safeguard your future as well as your child’s.
An insurance plan is useful when planning for your children’s education as well as your retirement.
While endowment plans are a safe way to grow your savings while enjoying insurance protection, unit trusts are another low risk option to consider for your financial goals.
You may also set some funds into a foreign currency denominated deposit or investment. If you are planning to send your child to a university in Australia, for example, funds in an Australian dollar time deposit or an Australian dollar denominated investment can grow your money faster than deposit rates, provided you can stomach the higher risk.
1A dipstick survey of 30 Singaporean parents, 76 per cent of whom were married with kids (Family Financial Awareness, Dec 2013).