May 29, 2015

Preparing Education Funds

In this modern era, quality education has become a necessity. Especially since the level of one's education can be one of the factors in determining a career. This has led to many parents planning to provide the best education for their children.

Along with the wishes of each parent to give their child the best education possible, they are faced with the realisty that the costs of schooling has increased substantially. Financial planning is the solution to make sure that their child's education is not interrupted. .

According to Izakea Mahdi, President Director of Mess Pierson Finas Investment Management (Kompas 8/7), there are a few factors that can be used to prepare for a child's education. Most importantly, start early. The longer you save for their education , the smaller the installments will be. Ozakea advises all parents to save as early as possible.

The second factor to consider is the interest rates offered. Higher interest rates can mean you can reach your target goals faster.

The next factor is insurance protection to ensure the child's education fund and minimizing the uncertainty that can happen in the future.

The last factor yet not the least is the flexibility of depositing and withdrawing funds. This last consideration is to anticipate any miscalculations or for any emergency needs. We should also be able to deposit funds whenever we can such as when a bonus is received.

Looking at these suggestions by Izakeea, it is actually not that easy to set aside an education savings program that can accomodate all of the above factors. Especially since banks launch the same products with different options and benefits. Account holders should be careful in selecting the right product. Read these tips on finding a saving account that is covered with insurance

Don't be fooled by an Education Savings Fund with free insurance!
To think that any banking product will offer free insurance is fool hardy. In real life, banks need to protect themselves from the death of an account holder from accidents or diseases, and thus must work with the insurance companies. No bank will take the risk alone since it is against the banking laws
On the other hand, insurance companies will definately charge for their services. If the insurance is free then the bank is the one who pays. If that is the case, the cost of the fund for the education savings will be high. To protect their profit margin, the bank would probably lower their interest rates. So even if insurance is "free" for a particular account, customers eventually pay for it from their lowered interest rates.
By lowering the interest rate of the education fund will cause the account holder to lose in the long run since the higher the fund balance becomes, the higher the "cost" is from the low interest rate. For example, a 1% loss from a balance of Rp. 1 million means that the "free" insurance premium is Rp. 10,000. However, should the balance reach Rp. 100 million, then the cost of the premium becomes Rp. 1,000,000.
The concept of providing "free insurance" in exchange for lower interest rates is not suitable for an education fund that is in effect an long term investment. The account holder in the long run will not gain as much as they could with a higher interest rate.

The best thing to think about insurance and the savings fund is to ask the cost of the insurance and the benefits it brings to the account holder. Basically, from this "free" insurance, how much does the account holder stand to lose (due to the lower interest rate) and how much is the total benefit of the insurance during the policy term.

Select a product that offers high interest
Everyone would hope to get the best result from their savings/investment. In that case, avoid any banking product that offers free insurance premiums for a low interest rate. The longer the term to save for the fund, the more the account holder loses from the opportunity cost of the "free" insurance.

Select an education fund that offers an insurance scheme that allows the account holder to focus on the education fund goals.
The point of having an education fund is to fulfill the scholastic needs of the children of the account holder. They therefore need some guarantee that the funds will be available to the children should there be a claim. For that, you should select an education fund that has clear benefits of the insurance.
Perhaps the key questions to ask are:
- How much is the benefit from the insurance for the education fund? Is it enough to fund the children's school?
- Will the account holder be protected from the risk of death/disability due to an accident or disease? When does that protection begin?

Choose an education fund where the account is locked until the end of term (maturity).
An education fund is to provide for your children's future education. Account holders must have another separate product for this end to ensure that the money is not used for other things. Thus, account holders should not be able to access their education fund for things outside of their child's educational needs..

Select an education fund that allows the customer to save routinely.
A good education fund allows their clients to save regularly through an auto-debit facility directly from their savings account. This is one of the advantages of Tabungan Pendidikan Danamon.

Choose a savings fund that has the flexibility to deposit monthly while guaranteeing to reach the targeted amount.
From time to time, the costs of educations go up. A good education fund should have the ability to allow customers to add funds monthly to anticipate this raise. They should also allow customers to deposit any amount whenever possible, in order to reach the targeted objective even if the costs of education has increased.
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