Midland Financial Solutions’ Director and Chartered Financial Planner Kevin Edwards is a father and knows all too well how expensive funding further education can be. Not only has he helped hundreds of families plan for this vital investment, but as a father of two he’s been planning for this expenditure for more than two decades!
Here Kevin outlines the basic steps you can take to understand your current financial position and get yourself ‘investment ready’ for making the move into some serious investment planning – see next month’s article to find out about investment strategies and product options.
Step one: Establish how much you’re going to need. I’d suggest assuming a minimum of £40,000 per child for a three year course.
Step two: Check what you’ve got already. Consider how you might be able to find the necessary funds. For example, do you already have savings you could use? Are you looking to build up a lump sum over time? Do you have a high enough disposable income that it could be used to fund some or all of the costs on an ongoing basis?
Step three: Analyse your expenditure. Are there savings you could make to free up extra disposable income? An extra £200 pm over 10 years equates to £24,000 (without any interest or growth).
Step four: Review your existing savings and investments. Are you getting the best possible interest rate on your deposit accounts? Are your investments growing at the rate needed to provide the required lump sum? Do you know how much investment risk your investments are exposed to? Are your savings and investments as tax efficient as possible?
Step five: Check your tax situation. Maximise your ISA allowances and, for couples particularly, ensure that your Income Tax situation is as efficient as possible. For example, is one of you paying a higher rate of tax than the other? If so, you’ve probably got scope to reallocate assets between you to save tax. Any tax saved is extra money for your fund.
Step six: How much time do you have before the funds are needed? The timescales that you are working to will have an impact on how you should invest, however, as a general rule, the more time you have the better. If growth can be compounded over longer periods of time, your money works harder. For example, £100 in an account earning 4% p.a. interest would grow by 22% over 5 years, but by 48% over 10 years and 80% over 15 years!
Longevity is equally important if you’re talking about investing in stocks and shares, because time moderates investment volatility. If you consider the FTSE100 returns over the last five calendar years (to 31st Dec 2011), statistically you have around a 40% chance of suffering a capital loss by investing in the FTSE100 over just one year. For each additional year you remain invested, the risk of suffering an overall capital loss decreases.
Step seven: Be realistic about your attitude to investment risk. Get good, independent, financial advice and invest in a way that makes you comfortable. Always understand the risks you are taking before you commit to investing – as you can lose money as well as make it.
Step eight: Plan for the worst. Planning for your child’s future education can’t be faulted; however, it’s important to consider other factors that may affect your family’s financial wellbeing. For example, are you protected financially if something unexpected happens? What if you die unexpectedly, or are unable to work due to long-term illness or incapacity? If such an event would impact on your ability to save the necessary amounts and you have not got adequate financial protection in place, then this will leave a large hole in your planning.
Once you’ve analysed where you are financially, it’s then time to seek some independent, professional advice about what sort of investment strategy will suit your objectives and timescales. Check out October’s news story to find guidelines on what investment strategies work, and when.