This article first appeared in Personal Wealth, The Edge Malaysia Weekly on December 17, 2018 - December 23, 2018

It is financially challenging to raise a child in today’s environment. Factors such as the high cost of living, elevated household debt levels and lower investment returns mean that parents need to plan well ahead for their children’s future.

Rohani Mohd Shahir, director of Hijrah Wealth Management Sdn Bhd, points out that it was financially more manageable to raise a child in the 1980s and 1990s. “When I was bringing up my children in the 1980s and 1990s, car loan tenures were not more than five years. But now, these can go up to nine years. And credit cards were not given to just any Tom, Dick and Harry as one had to have a certain level of income,” she says.

So, how much does it cost to raise a child in the Klang Valley? The financial planners who spoke to Personal Wealth estimate that parents would have to spend between RM393,000 and RM1.3 million per child on average from birth to university graduation. The total cost would depend on numerous factors, including the area in which you live, the type of childcare facilities and services you choose and the kind of education you want for your child.

Education takes up the lion’s share of the expenses, say financial planners. The overall cost hinges on whether parents opt for private or public institutions and whether these are located here or overseas.

Success Concepts Life Planners CEO Joyce Chuah’s estimate is based on her calculations for her middle-income clients who choose private education for their children. She believes that 30% to 50% of the cost of raising a child is incurred when the child enters university as it costs RM500,000 to RM600,000 a year on average to pursue an undergraduate degree in the UK or Australia.

The cost, of course, depends on where parents send their children for tertiary education, says Chuah. “If you are sending them overseas, then I would say it will probably be about RM1.3 million in total, or half the entire cost of raising them. But if you are sending them to a local university, then it would be about 30% of the total cost.”

Chuah’s estimate is close to what a recent report found. In 2016, AIA Bhd looked at the total cost of raising a child in the country and found that it ranged from RM400,000 to RM1.1 million. The report, titled “The true cost of raising a child in Malaysia”, took into account delivery costs, schooling costs and university fees.

Chuah’s estimate of RM1.3 million (the minimum parents would spend if they choose private tertiary education for their child) shows how costs have gone up due to inflation. She says parents must bear in mind that financial implications kick off well before a child is born. Check-ups, tests and prenatal supplements are some of the things they should take note of. And for those who find it difficult to conceive, fertility treatments could be another financial burden.

“I would say it costs RM20,000, from pregnancy to delivery of the baby, provided there are no complications during pregnancy and childbirth,” says Chuah.

She adds that working parents spend RM1,000 a month on average on childcare before their little ones enter pre-school, which can cost up to RM2,000 a year nowadays. Felix Neoh, a financial adviser and director of Wealth Vantage Advisory Sdn Bhd, observes that parents spend between RM800 and RM1,000 on childcare every month. According to AIA’s report, essentials and one-off purchases would set parents back RM3,000 a month on average as their child grows.

Chuah gives a breakdown of the education costs. “When a child starts primary school — assuming books are not subsidised and parents have to pay fees and allowances as well as for transport, uniforms, events and other miscellaneous items — it would cost about RM35,000 a year on average for them to send their child to a private school. For secondary school or year seven to A-levels, the cost is between RM44,000 and RM50,000 a year,” she says.

“As for monthly costs, parents spend about RM1,000 per child before he or she leaves for university. This only covers basic physical and safety needs, which means extracurricular activities, tuition fees and entertainment costs are not included.”

If parents send their child to a private university, living expenses would cost about RM640,000 a year, says Chuah. On the other hand, it would cost RM13,200 a year to study at a local public university, says Rohani.

She estimates that it would cost RM393,000 to raise a child based on her firm’s calculations for its lower-middle to middle-income clients. This estimate is based on the child attending government-funded schools and public university for their education.

Draw up a short-term plan

Neoh points out that the wide range of expenses suggested by the AIA report indicates that parents have choices to make. “One should always stay true to oneself by spending within one’s means rather than adopting a potentially dangerous motto of ‘Only the best will do’ when it comes to raising a child,” he says.

It is ideal for parents to put aside some savings before they start a family to cover the initial expenses so as not to cause an additional financial strain on top of taking care of the newborn child, says Neoh. He notes that it is common for parents to use their annual income to cover the child’s expenses from the early years up to secondary school.

“During this time, parents should be investing regularly for the long term so that there is enough time for their investments to compound and grow, to be able to meet the expenses of their child’s tertiary education. Time is your best friend — start investing as early as possible,” he says.

Farhana Syed Nokman, 30, who is currently pregnant with her second child, says she and her husband invest in the financial markets and the returns are specifically for their children’s education. She adds that they bought a medical insurance card for their firstborn when she was about five months old. “When she fell sick and had to be admitted to hospital, the insurance plan covered the bills. We just had to top up the cost so she could have a more comfortable room.

“I have also set up a Tabung Haji savings account, in which we put all the monetary gifts she receives from family and friends. On top of that, I deposit RM100 into the account every month. My daughter will only be able to withdraw the money after she turns 18.”

Chuah recommends that parents come up with a 5 or 10-year plan to help them manage their finances. “Some people do 10-year plans. But for the younger generation, life is dynamic and ever-changing, so a 5-year plan is a good way to start,” she says.

Another challenge that could see parents spending excessively is the pressure to keep up with the Joneses, which has been exacerbated by the use of social media, says Rohani. She points out that unlike in the 1980s or 1990s, people tend to show off what they spend on through Facebook or Instagram, with some even doing it in real time.

“It is common for children to ask for things that their friends at school have. But parents themselves feel the pressure to give their children the best and things they see on social media influence their decisions on what to buy for their children,” she says.

“Wage stagnation is another issue. Your pay should increase as much as the price of goods so you do not feel the pinch. Unfortunately, the percentage of increase in salaries is lower than that of the cost of goods.”

Dealing with unexpected expenses

First-time parents usually learn some lessons through trial and error. For instance, they may buy unnecessary things even though the items seemed like a good idea initially.

Wendy (not her real name), who gave birth to her first child about six months ago, knows this all too well. Despite receiving hand-me-downs and useful gifts before welcoming her daughter, she and her husband have spent money on things that did not meet their needs.

“During the prenatal period, first-time parents are bound to spend on things that may not suitable for them, such as a breast pump or accessories for nursing, because they had no experience of raising a baby. I bought a breast pump from a famous brand worth RM800 only to end up selling it for RM400 after only a month,” says the 42-year-old graphic designer.

“Then there are milk collectors, which everyone says are must-buy items. But after using them a few times, I found that we did not need them as well. This can be a hit-or-miss thing.”

As both Wendy and her husband have full-time jobs, the biggest monthly expenditure is childcare (RM1,600). The daycare centre is run by certified nurses and is equipped with a CCTV system.

“We opted for this type [of childcare] as we felt that it would be safer than hiring a personal nanny as we were concerned that the baby would pick up bad habits. The downside, however, is the illnesses they can get from the other children. One of the benefits of the daycare centre is the CCTV,” says Wendy.

She adds that there is a “hidden” cost if the baby has sensitive skin as this would require the parents to buy the more expensive diapers that do not cause the baby’s skin to react.

Wendy experienced a financial shock recently when her baby fell ill and had to make multiple visits to the hospital. This prompted her and her husband to buy a medical insurance plan for their child so that they would not be overwhelmed by hospital bills. The baby is now insured at RM180 a month.

Another unexpected cost is immunisation. Wendy’s daughter is about six months old and she and her husband have already spent more than RM1,000 on five to six rounds of vaccinations. “As we are spending a bomb on daycare, we chose to get the vaccinations at a semi-government hospital. But it can be cheaper or even free of charge at government health clinics. So, where you choose to do it depends on your preference,” she says.

Wendy says there are many “hidden” costs that could put a financial strain on parents. “I did not do any financial planning for the baby as we were just going with the flow. We just had to buy fewer things for ourselves. We also cut back on entertainment.

“But our monthly electricity bills have gone up since the baby arrived. I have had to buy new clothes as well as I could not fit into the old ones — on top of having to look for breastfeeding-friendly clothes. But with the baby, you would not want to shop. You want to save money.

“I just have to make sure that I have controllable debt and do not spend unnecessarily. My plan is to make sure that I do not have any credit card debt and live within my means. As long as my savings account does not dip by 25%, I will not panic.”

The parenting journey can be fraught with financial landmines. While parents want only the best for their children, financial planners caution them against sacrificing their financial security. Chief among the financial mistakes parents can make when raising a child is losing sight of retirement planning and taking on too much consumer credit as they focus on funding their children’s education, says Success Concept’s Chuah.

“Parents are taking out money from their Employees Provident Fund (EPF) account to finance their children’s education and that causes a huge leakage for their retirement. We [financial planners] do not recommend this. You can take a loan for your child’s education, but you cannot take a loan for your retirement,” she asserts.

“They also withdraw their EPF money to pare down loans, which is one of the biggest mistakes they can make. Loans, especially mortgages, are like good cholesterol whereas credit cards are like bad cholesterol.”

Chuah says while people may think that using their EPF money is helpful, they are actually sacrificing their future lifestyle. They are “living in the now”, but end up having little savings.

“They may have enough to finance their houses, cars and children’s education, but they are not thinking long term, such as the fact that they will not be able to work forever. The worst thing is when they accumulate credit card debt, which happens due to a lack of early financial planning and wage stagnation,” she says.

Chuah advises against buying insurance products that are labelled children’s education plans as insurance policies should be bought to cover the parents’ lives, not the child. There is no “economic value” on the life of a child as the parents are the ones who bring home the bacon, she says.

“Parents should buy life insurance for themselves as the saying goes, ‘Cover the goose, not the gosling’. Education plans are life insurance products, but you are supposed to buy insurance for children to cover unforeseen circumstances such as when they fall ill. So, you should buy living benefit coverage such as for hospitalisation and critical illnesses,” says Chuah.

“When you are shopping for your children’s insurance and you come across an education plan, always remember that whatever the insurer shows you [in terms of returns], they are merely a projection. Even if it is guaranteed, it is a future value. You have to compound the cost of education today to 18 years from now or discount whatever they show you to today’s value.”

Wealth Vantage Advisory’s Neoh says not paying attention to other risks is another financial mistake parents can make. For example, if they become incapacitated, they may be unable to earn income.

“Will the family’s cash flow be jeopardised? If the parents die prematurely, do they have a will and trust set up to ensure that the rest of the family is financially secure?”

After the birth of her daughter and on her financial planner’s recommendation, Wendy reexamined her insurance plans and included a death benefit so that in the event that she dies, her husband and daughter will not have to shoulder her debts.

Neoh cautions against focusing solely on returns on investment (ROI) as a means of growing wealth. “In fact, one needs to pay attention to the four factors of growing wealth — increasing savings, increasing investment ROI, reducing unexpected risks and reducing financial costs,” he says, adding that choosing the wrong investment vehicle to meet their children’s education needs could be a huge financial mistake parents make.

Funding your children’s tertiary education

Conventional wisdom says diversification is key to long-term investing success and Chuah holds this to be true for children’s education as well. She believes in having a portfolio that consists of both liquid and illiquid assets as well as risky and non-risky instruments — and having the portfolio reviewed every year.

It is also good to pump in the same amount of money each year towards achieving a targeted amount for the children’s education, says Chuah. The allocated amount can then be divided across the different types of assets to diversify the risks.

“What can be included in the pot can be properties, equities and blue chips. But if you do not have the time or expertise, then go for unit trusts or mutual funds. In terms of equities, buying bonds can balance out the risk of buying stocks,” she says.

“For properties, you can opt for real estate investment trusts (REITs). The thing about real estate is [the lack of] liquidity. It can be hard to sell, especially in times like these. It could be disappointing if the moment your child needs to go to university, you are unable to sell the property because it is not the right cycle.

“In my opinion, solely relying on insurance for children’s education planning is a no-no. I have met many people who were disappointed because by the time the plan matures or the child turns 18, they get pittance compared with what they were presented initially. They forgot to take into account the impact of inflation.”

Investing in stocks every year to fund a child’s education is a feasible method, says Chuah. She likes to tell the story of a geography teacher who bought a good stock for his child every time he turned a year older for the sole purpose of funding his education abroad.

“I think that is a good way of doing it. Buying into one blue-chip stock on the child’s birthday every year. It need not be a volatile stock — maybe something like Public Bank,” she says.

“Let’s say you need to accumulate RM500,000 by the time the child turns 18. Provided that the stock gives you an annual return of 6% on average, you would need to put aside about RM16,000 every year [into equities].

“However, the problem with holding only one stock is that all your risks are in it. You can buy into mutual funds, but that means paying some expenses.”

Chuah suggests that parents diversify their risks by allocating the RM16,000 to different areas of expertise, geographical regions, currencies and assets. She adds that parents must manage their reactions to the performance of the stocks and refrain from monitoring the counters too frequently.

“The geography teacher bought one stock every year and ‘closed his eyes’. In 18 years, he managed to send his child overseas. When he finally retired, he even received some additional returns,” she says.

Wealth Vantage Advisory’s Neoh concurs and suggests purchasing insurance for protection purposes instead. He says products such as endowment plans often fall short of clients’ expectations in terms of insurance coverage and investment returns. “Make sure that the policy is fit for purpose. We have seen many people purchase endowment plans that mature well after the child completes their tertiary education, rendering the policy ineffective as a tool for education savings.”

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