Protect education funds from the crisis
WHEN PRE-NEED COMPANIES selling educational funds started dying a slow death more than 10 years ago, many Filipino families turned to do-it-yourself investing to grow savings for their children’s education needs.
Now it appears that these alternative investments–mutual funds, unit investment trust funds (UITFs), stocks and bonds–are not living up to the hype. Last year, pooled funds were down around 40 percent and experts say investments in the stock market might take two or three years to recover.
These depressing events have shaken Filipinos’ confidence in this most basic principle in personal finance: Saving. Imagine this, just when you have conquered spending urges and socked away money regularly, the market turns and eats up most of your money pot. This has not been easy for one mother, who shared she lost most of her educational fund for her daughter to the closure of one rural bank.
“The Rural Bank of Paranaque is now closed. This makes me sick to my stomach. So, how should I prepare for my daughter’s college education? I have to invest in a better mattress to put my money under,” she says.
It’s truly a cosmic moment for many couples faced with the triple whammy of skyrocketing tuition fees, lower pay hikes if not job loss and shrinking savings.
But Micheas P. Dumlao, 45, who has two sons to put through high school and college, says it is still better to start saving early.
“It has been at the back of my mind for the longest time, but my wife Joyce and I realized just last year that it is time to prepare for my sons’ college education. If we don’t start now, it will be harder later on,” he says.
Micheas’ and Joyce’s son Michael Reuben is a first year high school student at the Philippine Science High School, the state’s premier school for intelligent children and tuition is minimal. If he gets into the University of the Philippines in three years, also another state college, tuition expenses could be at P1,500 per unit, or at least P22,500 to P31,000 per semester.
Micheas expects books, transportation, clothes, laptop and other expenses to add 80 percent of this cost. That means he needs more than P300,000 to finance his eldest son’s college education.
Bankrolling their second son’s intellectual development will be much more challenging.
Jason Matthew is 9, now studying in a private school and wants to study at the Ateneo de Manila University. Historically, tuition fees outrun inflation at around 8-10 percent a year, especially for preschool, elementary and high school.
Micheas estimates that he needs to save at least P1.5 million to put his youngest son through college alone.
Fortunately, Micheas is also a life insurance agent in a multinational company and he knows his numbers. He plans to move his education money pot when it reaches P200,000 to a higher-yielding account, and supplement this with his investments in a single-pay variable life product sold by his company. Then he will look for more investment outlets.
All these financial maneuverings will not be successful if the entire family is not pushing together as a team, he says. To set aside P8,000 monthly, an amount that can already buy grocery items for one month for an average family of six, Micheas says the Dumlao family members had to change their lifestyle.
“Instead of Yellow Cab, we eat at Shakey’s and we don’t order drinks anymore. A P60 bottomless iced tea can already buy one siopao. You know, when I have to eat lunch in a mall, I buy my drinks inside the grocery,” he says.
When he has appointments in business centers in Metro Manila, Micheas says he has begun to plan carefully where to park his car. “You need to splash on a little bit of cologne before you go to your appointment, that’s true, but careful planning can save you quite a bit of money,” he says with a chuckle.
In the Filipino psyche, education is sacred. Parents will often singe their eyebrows to send their children to the best schools, and the Dumlao couple is no exemption. Micheas says they are also working on increasing their income, writing down their goals and making sure both couples are protected from sudden death or illnesses.
Investment tools used wisely
Marvin Fausto, senior vice president and chief investment officer at the Banco De Oro, says on top of more careful spending and saving regularly, Filipinos also need to learn how to use the right investment tools for the right purposes. You can’t expect to crack open coconut shells with a slender knife.
If you need the money for tuition in the next two to five years, the right approach would have been to move the money pot to money market funds and other conservative placements as the date for the need approached.
“Last year, I’ve seen a lot of people lose money in the market. They were lured by the historical high returns in the market from 2002 to 2007 that they forgot why they were in the market in the first place,” Marvin says.
Because too many investors were lulled into thinking the high returns would last forever, they gambled the money they would soon need, says Marvin.
“It is still true that mutual funds and UITFs are good long-term investments. But the right strategy would be to review your investment objectives and plans regularly. When the need is near, you move it to more appropriate investments. That’s the value of constant review,” he says.
Banco De Oro’s bond funds, for example, yielded 33 percent until 2008 since inception in April 2005. That’s still 11 percent per year, much higher than any time deposit return. Balanced funds gave 45-percent return since 2003.
“Equity funds are the ones that were really hit by the crisis at 4.5 percent since May 2005. You would have really lost money if you sold last year, but it also went as high as 100 percent in 2006 and if you took your money out that year, you would have doubled your investments,” he explains.
That’s the wisdom that comes from hindsight. Now, if you are already pinned down by the market turmoil, Marvin’s advice is to exhaust all other means to pay for tuition and other educational expenses, like getting subsidized student loans from schools, selling other assets like properties and earn additional income, paying monthly rather than annual installments.
“The worst time to sell is when the market is down. And that is now. If you have other means to get money for college education, do not sell your losing investments. Wait for them to recover,” he says.
Marvin expects the market to recover in two to three years. By then, he believes investments in equities, bonds and pooled funds to redeem their reputation.
“Attack your goals depending on the time frame when you need your money. If it’s a short-term need, put it in a money market fund in the biggest banks, so that even if the bank closes, the fund will still be there,” Marvin says.
(For more personal finance articles, visit MoneySmarts at http://blogs.inquirer.net/moneysmarts.)