I am MaryAnn, 27, a single mother of twin girls aged one year. I got a job three months ago and earn a net salary of Sh33,800. I live with my mum at home and this helps keep my expenses low. I spend Sh4,800 on transport in the morning and evening. I contribute Sh8,000 to the general household budget to help with my babies’ special meals. I pay the house-help Sh10,000, use Sh2,000 on lunch, and save Sh3,000 on my mobile phone. I allocate Sh6,000 on miscellaneous baby expenses.
I am worried that without my parents' help, I wouldn’t be able to stand on my own and cater for my babies. My babies’ daddy is deadbeat and I wonder if I should take him to the children's court since he has a good job and can contribute. Is this a good idea? How do I plan my small salary to secure my children’s future? Should I get an education policy and for how much? What will the returns and risks be?
Inziani Khasiani, a financial consultant and executive director at Klientele Kenya, says:
Looking at your salary and how the same is distributed across your expenses, I note food takes 30%, house help [labour] another 30%, miscellaneous baby expenses 18%, transport 14%, and savings takes 9%. You do not have any commitment towards the education budget and the process you have started is a good indication of how much you value your children's education. According to the Kenya Bureau of Statistics Finaccess Household Survey Report, education expenses are a second priority in households’ consumption budget at 30.2% compared to food which has a priority of 31.8%.
An education policy primarily focuses on ensuring your children receive a quality education by providing financial support for their studies. It is designed to give you peace of mind knowing that your children’s education will be well taken care of, even if something unexpected happens to you.
Savings and investments are essential components of any financial strategy. Saving entails consuming less of your current income in order to consume more in the future by setting aside a portion of your income in some form of an asset. This may involve opening a savings account with a bank or a Sacco and making regular contributions to the account until you attain the desired amount. Education policy, especially with an insurance company, is a form of savings.
Investments, on the other hand, involve the purchase of an asset with the hope of generating some income in the future or the asset appreciating. Saving is not the same as investing. Saving focuses on capital preservation, whereas investing focuses on capital appreciation and wealth generation. An education investment plan with an investment company falls into this category.
While most insurance companies’ policies work on the structure of an agreed amount per month, per quarter or per half year for the period of the policy, the investment companies work with flexibility in case the client wishes to increase the contribution to higher amounts within the policy period.
Financial planning and goals setting require that you come up with an estimated target amount of coverage you need for your education policy/plan. The amount you want to have saved at the end of the period. The target may be post primary and tertiary/university, or tertiary/university alone. Whether the children will be leaning towards arts or sciences will help come up with an estimate. The cost per year for science related courses is in the region of Sh600,000 per year or Sh1,800,000 for a three-year course. An estimate for arts would be in the range of Sh200,000 per year or Sh600,000 for a three-year course.
Since the education expenses will be incurred in the future, you also need to factor in inflation.
The next step is to look at your budget and identify areas to cut down costs in order to create room for funds to be committed towards education policy/plan. You will need to cut costs on your current expenses to build headroom of a minimum of Sh7,000 being 21% of the budget. A monthly commitment of Sh7,000 for 15 years will result in a maturity of approximately Sh1,600,000 through an investment company or Sh1,400,000 through insurance company. Commit to move the 21% to 30% in the next three or four years. Upscaling your monthly contribution will be crucial to cover inflation over the next 15 years. I also recommend that you move the savings from your mobile to either a Sacco or Money Market Fund. Commit some regular savings through the Sacco to build your savings culture.
Before you purchase the policy, carry out a fact-finding assessment of the add-ons being offered. There are a few suggestions to consider. Take the policy or plan with as many features as possible:
1). Offer a lump sum payout to the beneficiaries upon the policyholder’s death.
2). (Some) cover terminal illnesses, financial assistance to the policyholder during their final stages of life.
3). (Some) include coverage for total and permanent disability, providing financial support if the insured becomes disabled and unable to work.
4). (Some) have annual bonus payments you can use to pay for your child’s other needs like books and computers.
5). (Some) have waiver of future premiums in the event of a guardian's death.
6). (Some) have a last expense component.
Education policies/plans have a complex structure which make them difficult for ordinary people to understand. Do not take the sales person’s word on face value. The recommended approach is to book your policy through a broker as opposed to having a direct link with the insurance company. It’s important to do due diligence on the plan provider. Available information from the Insurance Regulatory Authority shows firms with good repayment records.
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