Here Is How To Financially Plan For The Education – Cytonn

The year 2020 was marked by the occurrence of a global pandemic whose effects were felt globally. The tough operating environment during the year saw most firms scale down their operations leading to massive job losses and reduced income.

With the disruptions occasioned by the pandemic, the World Bank estimates that close to 2.0 mn Kenyans were pushed into poverty in 2020 as people prioritized consumption and provision of basic needs with the little money they had.

As such, most financial goals such as joining investments and savings schemes were also disrupted. Given that financial planning helps reduce and possibly eliminate the financial distress that may arise from various responsibilities or unexpected situations, financially planning for education ensures that one has the ability to provide for their dependent’s education.

Education plays a central part in households’ consumption budget with the average spend ranging from about 10% to 30% of the total income. When looking at coming up with the right plan for education there are a couple of things that one needs to look at.

Firstly, one should buy into a plan that they can comfortably afford so as to make sure they meet the premium payment schedule as agreed, as a guardian, you would want to ensure that your dependents are adequately covered and you will choose the plan that speaks to the risks you are trying to cover against and the cost of the school or learning institution that you want your child to attend will inform the type of plan that you will choose.

Education Investment Plans are medium to long-term mutual funds promoted by a financial institution, usually an Insurance company or an Asset Management firm. These plans are easily distinguishable in that they often have a lock-in period of investment whereby the guardian is required to make periodic contributions, usually monthly.

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The beneficiary of the funds could be a dependent or one may save for their own education. Education Investment Plans in Kenya typically have minimum monthly contributions with the amount ranging from Kshs 1,500 to Kshs 7,000.

However, the payments are flexible in that one may pay monthly, quarterly, semiannually, or annually, depending on individual preferences.

In addition to Education Investment Plans, individuals can take advantage of other investment avenues when financially planning for education which includes; Money Market Funds(MMF) which are a short-term investment vehicle that consists of pooled funds by investors who do so through a fund manager.

The main objective for MMFs is to provide above-market returns, preserve the capital invested and provide liquidity as the lock-in period is usually short and withdrawal is easy.

Individuals can also consider a savings accounts in a bank, currently, we have many banks in Kenya offering targeted savings account for saving for various goals including education. These accounts have seen a high uptake as many Kenyans consider banks to be safer options and fail to pay enough attention to the returns they get.

In order to improve the uptake of financial planning for education purposes in the country, fund managers who provide education investment plans should get a tax relief on those specific funds.

The tax benefit should be extended to the fund itself as well as the contributor, just like the benefits accorded to pension contributors which have been a key driver of growth in the pensions industry which has seen an Assets Under Management growth by a 10-year CAGR of 15.8% to Kshs 1.3 trillion as of December 2019, from Kshs 0.3 trillion in 2009.

We believe that investing in an Education Investment Plan will ensure that even in tough economic times that
may affect your business or job security, individuals can rest assured that they have the ability to provide for their dependent’s education. Saving for education from an early stage helps to minimize the need to take on debt in the future to offset education-related expenses as well.

For more information, please see our Financial Planning for Education topical.