Underlying Costs of Adult Children?

Children are expensive. We hear this all the time from any parent of any child. There is no getting away from the fact that if you start a family your life changes in almost every way. For many upper most on their minds are the facts that their social lives will transform to something new; there will be sleepless nights; changing diapers and feeding will become a seemingly 24/7 task. Then there is the constant care a family requires from toddler stage through first school, first night away, secondary school, first boyfriend/girlfriend, becoming independent and leaving home for university.

Some recent Net Worth articles have highlighted the cost of tertiary education for adult children of expats. When they are young, many parents do not think as far as tertiary education and often allow the children to miss the boat in that they simply do not have the means to contribute to the costs of university when the time comes. But if you start early, it is amazing just how much you can help during this important phase of their lives.

The cost of education is climbing all the time with inflation. But did you know that these costs are generally inflating at accelerated rates compared with the general cost of living? Currently education costs are rising between 7% and 10% pa.

Today, typical tertiary education costs for students in Europe or Australia will total around USD35,000 per year, including basic living costs. Thus with inflation, when your child of say one year gets to the point of starting university in seventeen years’ time, the costs will be somewhere above USD115,000 per year.

By saving around $1,250 per month, or $15,000 per year, you can pay for a four year education programme for your one year old. This can be completed via a structured savings plan which will give you access to the financial investment markets, allowing you to benefit from dollar cost averaging as well as compound growth. These two factors combined can afford you superior returns on regular contribution savings plans.

However, there are pitfalls to these plans so if you decide to embark on one, carefully look at the terms and conditions to make sure they suit you and your circumstances. If any adviser tells you that after an initial period you can “do anything you like with the proceeds”, the chances are you are getting the wrong advice. But used properly, these plans work very well.

There are other challenges parents need to think of. These include not only succession planning when they would prefer to leave a legacy for their adult children but also such important aspects of a young adult life as the purchase of a property. This is always a struggle for young people but these days it seems to have been made even worse following the 2008 financial crash.

Institutes which lend against property, in order for young people to mortgage and purchase their home, are applying very stringent rules these days. This has created a situation where the proportion of finance available, the loan to value ratio (LTV), has become lower against the now ever increasing capital cost of purchasing a property.

The purchase price of property is now as much as five to seven times the annual salary of a young career person. Thirty years ago the average was somewhere around three times salary. Today the amount required as a deposit is usually 25%-30% of the purchase price, compared with around 10% thirty years ago. This creates a dilemma for youngsters as they struggle to save sufficient funds to afford the deposit to buy their own home.

If this were your children, would you have the means to assist? If you start to think about this carefully when your children are young, you may be in a position where you could help them. Of course, for those with larger families this can be multiplied into a very daunting task.

Many expats have the relative luxury of being able to plan provisions in more than one way. See Net Worth 20 April 2014 “A different view of property”. There I looked at the possibilities of using property as an asset to assist your children to achieve tertiary education and creating a succession plan for them at the same time.

If you are able to afford this solution and start a structured savings plan as well, you have the best of both worlds as the savings plan will give you far better access to liquidity once it reaches or gets nearer to maturity.

By starting early, you can assist your adult children in more ways than you perhaps have imagined. This could enable them to have a better life and they can learn to appreciate this as they can participate along with the plans so that they feel part of the overall strategy.

Questions to the author can be directed to PFS International on 02 653 1971 or email to enquiriesthailand@fsplatinum.com

Andrew Wood has been an expat in Asia for 34 years and is Executive Director with PFS International. He has been writing Net Worth articles for six years and has made a significant contribution to the PFS library of financial service articles dating back over nine years. These articles which cover the complete A-Z of financial planning are available to readers on request.

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