Saturday, April 12, 2014

How to Create a College Fund For Only Php5,000

Of the six sessions I've attended so far for my Registered Financial Planner (RFP) course, the one that really caught my attention was the lecture on Time Value of Money.


Even the fact that TVM involved a lot of computation did not deter my interest (this from a person who chose her college course based on the number of math units required. Math 1 for the win!), and I actually stayed up past midnight a few days after my class researching on TVM and solving problems. Imagine that!


Anyway, what really hooked me on TVM was how I could start planning for Ace's college fund starting now, and for as little as Php5,000 a month. Here's how I plan to go about it:



A) Research on current rate of tuition fees. This infographic by GMA News is very helpful.





 

B) Predict how much the future tuition fee will be. Let's pretend that my 10 month old son is accepted to ADMU 18 years from now, how much will a semester's tuition fee be by then?


With a 10% increase rate per unit every year, here's how the problem can be laid out:




Present date: 4/12/14


Future date: 4/12/32


Present value: Php160,000 (1 year tuition fee)


Rate: 10%


Compounding period: annual


(Future value calculator)


Future value is Php889,586.77 / year x 4 years = Php3,558,347.08 needed for a 4 year course.



C) Decide what investment vehicle to use. I have 18 years to come up with Ace's tuition fee so I can afford to be aggressive with my investing. However, from experience, I know that I don't have the required diligence to monitor the stock market, so I'll do the next best thing and invest in an equity fund.


D) Choose the equity fund to invest in. I chose First Metro Save and Learn Equity Fund (FAMI-SALEF) as my equity fund of choice because it had a low opening requirement (Php5,000) and I could top up monthly using my Metrobank Direct online account.






 Using the 5 year performance of FAMI-SALEF, you get a yearly average of 27.47%


E) Use compound interest to your advantage. If you opened an account with FAMI-SALEF today, and topped up with Php5,000 every month for the next 18 years you would have set aside Php1,080,000.00. But with the use of compound interest, your investment can balloon to 3x-4x its actual value. Here's how the problem can be laid out:




Present value: Php10,000 (the minimum opening amount for FAMI-SALEF)


Monthly addition: Php5,000


Years to grow: 18


Interest rate: 12% (even if the 5 year average is at 27.47%, past performance doesn't guarantee future performance, so let's be prudent and peg it at 12%)


(Compound interest calculator)


Future value: Php3,421,882.56 which is just Php100,000 less than our target amount of Php3,558,347.08.



F) Automate your monthly top-ups or develop the habit of making monthly top-ups. 


G) Move money to a safer vehicle once you've reached the target amount. When you've reached the target amount, move it to a less volatile investment vehicle (i.e. bonds, bond fund, time deposit) because you want to keep your money intact for your child's education.


And that's that. It's not so difficult right?




13 comments:

  1. {sorry off topic}
    hi i've been reading your blog for almost weeks now. they're so informative, easy to understand. ive enrolled my self to sunlife's MF and planning to get another with FAMI to "diversify" my investments. :)) good thing nalaman kung financial adviser ka pla ng sunlife ( i was relieved). gusto ko sanang magtanong (which i'm hesitant to ask with my FA and also we wont be seeing for 3 weeks kasi may important trip sya) pahirapan ba yung withdrawals mo with your investments. like "they'll ask you a lot of requirements and failure of complying such di mo makukuha yun ininvest mo" kind of stuff. hehe bago plang kasi akong nag umpisa and i kind of get alot of negative comments from people around me which make me kind of hold back with my investment.
    hope to hear from you. i would really appreciate it much.

    ReplyDelete
  2. Hi Lucky,

    I'm not a financial adviser for Sun Life, I'm just another customer like you.

    Withdrawing your funds is easy. It's just a matter of filling out the appropriate forms (my agent emailed me the forms when I asked him for them) and then sending them. After a few days, you'll get your pay-out either through a check or they'll deposit it in your savings account. Sorry but I get quite fuzzy with the part of pay-out, because I confuse the mode of pay-outs of Sun Life and Fami. Basta it's one of those and pay-out is easy for both companies.

    And feel free to ignore the negative comments about investing from the people around you. Those are usually brought about by ignorance, even if they're well-meaning, so do not pay attention to them :)

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  3. Hi Jillabs!

    P10k na ba talaga ang opening sa FAMI-SALEF?
    ayon sa website bakit P5k daw?
    Plano ko na din kasi mag invest sa SALEF, kaya ayun.
    Ano ang totoo? Thank you in advance!

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  4. You're right, Php5,000 lang ang initial investment sa FAMI. I'll edit my post now. Thanks!

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  5. Thanks! Jillabs, the best ka talaga! :)

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  6. di po! hehe.
    bat ganun, parang di alam ng metrobank agent ang pag process ng mga papeles? nilagay lang nila sa isang envelope tas ayun na. pero kinuha ko ulit kasi parang di sila sure.
    so mas maganda ba direct initial investment na lang sa FAMI?

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  7. Mas mabilis talaga kung diretso sa fami ang application form. If through Metrobank, they'll submit it after a few days or weeks pa.

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  8. salamat po, parang mas mabilis pa reply nyo kesa sa process ng metrobank!! :))

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  9. Would just like to clarify basis for imputatoin of compound interest. Aren't returns realized via redemption of shares at unit prices at time of redemption and not by interest gains, such that if the unit prices at time of redemption is lower than price at acquisition of shares, losses can occur?

    ReplyDelete
  10. You're right. The value of mutual funds are computed at the time of redemption, with the return based on capital appreciation.

    Compound interest only applies to mutual funds if the interest earnings are reinvested so that the amount that earns interest increases every year. Check out the graph in this link: https://www.franklintempleton.com/retail/pages/generic_content/education/fin_basic/power_compounding.jsf#.U5hHgIbRHzo

    I don't think mutual fund companies in the Philippines issue earnings though, which can then be reinvested. So compounding might not even apply locally.

    Hmmm....now I'm really confused:p

    Maybe you should ask Randell or Fritz, they'll probably know the answer :)

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  11. I also opened an 'in-trust-for' account in FAMI equity for my son's college education fund. I am just starting so it is still a long way to go. :-)

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