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What is the Best Way to Invest For Your Child's Education?
What is the Best Way to Invest For Your Child's Education?
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Money Management

What is the Best Way to Invest For Your Child's Education?

Money254
Doris Kendi
May 20, 2022

It's every parent's dream to see their child live up to their full potential and achieve all their wildest dreams. Setting up your child for future success and a rewarding career starts with providing them with good quality education.

In Kenya, the cost of education is on the rise. Tuition fees at universities have more than doubled over the last two years. The government is cutting down on education grants and bursaries for students. Parents countrywide struggle to finance their children’s education and many are increasingly being driven into debt.

If you are lucky enough to still have time before your children require huge expenditure on education such as secondary and college fees, you must make the right money moves today that wil;l cushion you from the inevitable financial strain associated with quality education. 

Investing for your child's education will make sure you mitigate all the obstacles that might prevent your child from getting the quality education they deserve.

This article will dive into the best ways you can invest for your child's education and the investment plans available for parents.

Also read: Where Do I Keep my savings? The 7 Main Places to Put Your Savings

Education Insurance Policy 

Buying an education insurance policy is one of the best ways of investing in your child's education. This policy helps a parent save towards the education of their child safely. Most insurers in Kenya will even bundle this plan with a life insurance policy. 

Insurance companies offer different variations of this policy. It would be best if you talked to your insurance provider, and they will craft a policy that is tailored to your goals and needs.

Also read: Common Money Mistakes That Parents Make (And How to Avoid Them)

How it works:

A parent will be required to pay a monthly or annual premium over a specified time. After maturity, the insurer will pay a lump sum of money that can be used to educate the child.

Some insurers will allow partial withdrawal before maturity. So, as a parent, you will be paying the premiums and benefitting from the fund at the same time. The withdrawals can pay for your child's books, uniform, and educational trips.

If the educational insurance policy you buy is bundled together with life insurance, the insurer will give a lump sum of money to your child in case of the parent's death.

Other insurers also offer Parent Disability Protection. This means that if the parents become permanently disabled and they're not able to work and pay the premiums, the insurer will provide a life cover until the policy matures.

This is one of the major advantages of taking this route to fund your child’s education. That is if you get the cover bundled with life insurance and a disability cover. 

Beyond this, you must nitpick the details of the policy to make sure the returns on the premiums are worth sticking to an education insurance fund or if you would rather choose another avenue that may assure higher returns.  

Invest in Money Market and Mutual Funds Accounts

When investing for your child's education, you are required to diversify your investments and lower your exposure to risks. Not every parent is an expert at that. 

Mutual funds involve people putting their money together and giving it to professional institutions to manage it. These institutions are called fund managers that have professionals with vast years of experience in investing as the people running the day-to-day investing of the pooled funds. 

A fund manager will invest on your behalf and, in return, pay you a proportion of the profits based on the proportion of the fund that you own. They'll invest in different businesses, stocks, commercial paper, and government bonds. Doing this lowers the risks of their clients losing the initial investments.

Fund managers are regulated by the Capital Markets Authority as well as have a trustee who ensures the safety of the investors fund by making sure the manager only invests in what the fund is allowed to. 

Your proportion of the fund’s profits is paid annually and depending on what option you choose, you can either reinvest the profits year-on-year and benefit from the magic of compound interest or pocket the profit every year and pump it into other investments until your child needs the money. 

Whichever way you choose to go, returns from the fund can be channeled to your child’s education especially if you start early and let your interest compound. You, however, have to make sure that you calculate the estimated cost of educating your child to arrive at the principal amount you need to invest before then to arrive the closest to that estimate. 

Also read: Where Do I Keep My Savings? Money Market Fund

Buy Treasury Bonds

The government issues treasury bonds through the Central Bank of Kenya. They are a form of long-term investment that offer semi-annual interest payments. The beauty of this type of investment is that it carries zero risk. The government secures your investments.

This type of long-term (up to 30 years) and risk-free investment is safe for parents investing for their child's education. Treasury bonds' interest rates are fixed, and therefore you can easily predict how much your investment will yield.

The Central banks auctions these bonds on a monthly basis. These bonds come in different types; parents can choose to invest in bonds that best fit their needs. The CBK has a lot of resources on its website that can help you get started with treasury bonds.

Read Also: Is Investing in Government Bonds a Good Idea? (Pros & Cons)

Invest in the Stock Exchange

Investing in the stock market can be highly rewarding. It involves buying shares of publicly traded companies. You can buy shares of Kenyan companies that are traded on The Nairobi Securities Exchange to get started.

There are two ways you can earn money when you invest in stocks or your child’s education. The first is, that since you are a shareholder, you will be receiving dividends at the end of each year if the companies whose stock you hold is profitable. 

The second way is selling the stock. Share prices can increase significantly over time. If this happens, you can sell the shares you bought at a profit.

Stocks are volatile. It is advisable that you properly research the companies you want to invest in preferably with the help of an expert and create a portfolio that would best indicate future profitability. 

Depending on how well you review the stock market, the extent of diversification and the amount you stake, you could arrive at your targeted amount earlier than expected. The stock market is probably the only avenue that can give one supernormal returns in a short period when compared to other asset classes. But it can also wipe out most or all of your initial investment. 

The high risk associated means stocks cannot be the sole plan you have for educating your children because things could go into either of the extremes. 

Look Into Land and Real Estate

Land and Real Estate rarely lose their value. Land prices have been skyrocketing in Kenya as it is seen as the last best investment option available. Everyone looking to build wealth for themselves and their families is pouring money into this as it is an attractive and profitable investment. That is what makes it one of the best ways to invest for your child's education.

Here are some other options to keep in mind: 

  • Rental properties. You can develop rental properties and use the proceeds as your child’s education fund. 
  • Property for sale. This will involve buying land and developing it by building properties and selling off the properties. This is a good investment for parents looking for short-term returns. The profits you make from these ventures can be used to educate your child.
  • Real Estate Investment Trusts (REITs). REITs are relatively lower risk investment types for those looking to benefit from the high anticipated returns from real estate but do not have enough money to go it out on their own. REITs pull together money from different investors and invest the money in real estate. The profits generated from the real estate will be divided among investors annually which you can use in providing education for your child. If you expect your kids to join secondary school or college in the next 10 years you could be reinvesting your profits to create an even bigger fund before then. 
  • Flipping properties. This type of real estate investment will involve finding properties that are being sold below their market value and buying them. The property might be old or damaged, you will have to facelift them to improve their quality and hence their value. You will then put them on the market and sell them for profits that will go towards your child’s education fund. Note that property flipping is an extremely complicated undertaking and would require a lot of experience or expert advice to do right and make a profit. 

Also read: 7 Ideas to Diversify Your Sources of Income

Saving Vehicles

This method may appeal to many as the easiest and less complicated way to invest for your child's education. 

Also read: Is a Bank Savings Account Good Enough for You?

Some banks will let you create a fixed account to save towards a specific goal. Some of the available options are:

  • Goal Savings Account. This fixed saving account will let you save towards your goal for up to 5 years and boost competitive interest rates. You contribute monthly. The bank will pay the interest on maturity based on your daily balances throughout the savings period.

You can also choose to create a custodial bank account for your child. The account will be in their name, and you will be depositing money into it. Most major banks in Kenya offer this option.

Also read: Where Do I Keep My Savings? Fixed Deposit Account

Saving for your child/ren education requires a lot of discipline and commitment, so set a monthly target and make sure you reach it every month.

Other savings vehicles include Saccos which over the last decade have proven to offer relatively higher interest rates than other financial institutions with savings accounts.

Also read: Saving For Beginners: Follow the 50/30/20 Rule

WRAPPING UP.

Investing for your child's education isn't something you can choose to ignore. The quality of education you provide for your child will determine their place in society and their future.

It would help if you chose a high return investment to cushion you from inflation and the rising cost of education. The investments should also be low risk as any loss to your investment will interfere with your plans of properly educating your kid. It would be best if you also diversified your investments to maximize profits and contain losses.

Define your goals and means well to know when it's appropriate to start investing for your child's education. You can start as soon as they're born and invest until their graduation day. 

Ultimately, the earlier you start, the easier it will be for you. 

Doris is a finance professional, freelance writer and SEO expert. She has experience helping businesses of all sizes create content that helps improve their site quality and increase their online traffic. She is a personal finance and wealth creation enthusiast and a frequent contributor to Money254. Visit Doris' personal website to learn more about her work.

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