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Is It Possible to Pay For Your Child’s University With Their Angbao Money?

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The Motley Fool Singapore

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We’ve always been suspicious of what our parents meant when they said “we’ll safe keep your Angbao money for you” when we were kids. Well, while most well-meaning parents set up a savings account to give their kids a headstart on savings, The Motley Fool shares with us how it could be put to better use.

For those of us with young children, their future education is always a priority. However, with the ever-rising cost of education, it’s only fair to wonder if there’ll ever be enough savings to ensure they have the best education possible?

What if there is a possibility that kids can pay for their education on their own? To be more precise, I am thinking along the lines of how they might be able to pay for their own university education with the “Angbao” money they save throughout their lives.

The Lowdown on “Angbao”

For those unaware, “Angbaos” are a common part of the annual Chinese New Year celebrations. The most recent one just took place last Friday on 31 Jan 2014. The term “Angbao” comes from a Chinese dialect which is literally translated as “red packets” in English.

These red packets are given to the younger generation by elders as a form of blessing and usually contain money (which can be quite significant depending on the generosity of the giver!).

With that out of the way, let’s get back to the more interesting topic of how kids can pay for their own education.

 

Segregating An Account

Firstly, to ensure that kids have sufficient funds for their future education, it will be better for parents to have a segregated account for each child.

It does not even need to be an actual, separate bank account; it can be just a simple spreadsheet where parents come up with a virtual segregation of money.

So every year, when children receive their new “Angbao” money or other monetary gifts for their birthdays and such, parents can record it into their personal records.

In this way, there is a systematic and disciplined method of helping kids save up for their future.

 

Magic of Compounding

Once there’s a proper system in place for recording savings, parents could let their kids co-invest together.

Since there is usually around 20 years from their birth to their University days, time would be on the children’s side

For example, imagine each child receives a total of $2000 annually from his or her “Angbao” collection and other monetary rewards. Even without any growth, the kids would have saved around $42,000 by their 21st birthday.

AGE

0 Percent

6 Percent

10 Percent

15 Percent

1

$2,000.00

$6,799.13

$14,800.50

$37,643.04

2

$2,000.00

$6,414.27

$13,455.00

$32,733.07

3

$2,000.00

$6,051.20

$12,231.82

$28,463.54

4

$2,000.00

$5,708.68

$11,119.83

$24,750.91

5

$2,000.00

$5,385.55

$10,108.94

$21,522.53

6

$2,000.00

$5,080.70

$9,189.95

$18,715.24

7

$2,000.00

$4,793.12

$8,354.50

$16,274.12

8

$2,000.00

$4,521.81

$7,595.00

$14,151.41

9

$2,000.00

$4,265.86

$6,904.54

$12,305.58

10

$2,000.00

$4,024.39

$6,276.86

$10,700.50

11

$2,000.00

$3,796.60

$5,706.23

$9,304.78

12

$2,000.00

$3,581.70

$5,187.48

$8,091.12

13

$2,000.00

$3,378.96

$4,715.90

$7,035.75

14

$2,000.00

$3,187.70

$4,287.18

$6,118.05

15

$2,000.00

$3,007.26

$3,897.43

$5,320.04

16

$2,000.00

$2,837.04

$3,543.12

$4,626.12

17

$2,000.00

$2,676.45

$3,221.02

$4,022.71

18

$2,000.00

$2,524.95

$2,928.20

$3,498.01

19

$2,000.00

$2,382.03

$2,662.00

$3,041.75

20

$2,000.00

$2,247.20

$2,420.00

$2,645.00

21

$2,000.00

$2,120.00

$2,200.00

$2,300.00

 

However, if we help them to invest their money and let it compound year after year, that pot of money can become a much bigger sum.

At a growth rate of 6% a year, they would have at least $84,000 by 21 years. At 15% a year, that $42,000 worth of savings would be worth a quarter of a million by age 21.

 

Foolish Bottom Line

You might feel that all this sounds great in theory but is not achievable in practice.

Yet, all the growth targets that were discussed are actually quite achievable. If we just examine the performance of stocks for the past 22 years in Singapore for some of the 30 components within the The Straits Time Index (SGX: ^STI), companies like Jardine Cycle & Carriage (SGX: J36), United Overseas Bank (SGX: U11), Singapore Press Holdings(SGX: T39) and Keppel Corp (SGX: BN4), all have returned more than 10% per year on average for their shareholders.

So instead of worrying about paying for our children’s education in the future, why not help them pay for it themselves?

 

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The Motley Fool Singapore

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