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Raising a child is not that expensive, if you manage your finances and expectations
People & Society Articles

Raising a child is not that expensive, if you manage your finances and expectations

Aaron and his baby

Aaron and his first born, Emma, in 2008

By: Aaron Low

One of the biggest worries most parents in Singapore have is the costs associated with raising a child.

The gynaecologist visits and the subsequent hospital and delivery fees will set parents back by thousands of dollars before you even get to change the first diaper. Then add on childcare, ‘enrichment classes’, toys, and later, tuition – the bills grow as the child grows too.

Some insurance companies have estimated that raising a child to age 21 in Singapore can cost around $200,000, to as much as $1 million. Well, I have three kids and the last I checked, I do not have $3 million lying around under the bed, mattress or in the bank account.

But I do believe in ensuring that my kids get the best that I can afford. There are of course many ways to save for your children but one simple way is to tap on existing government schemes.

Making government grants work for you

Most young parents would know that the government provides a Baby Bonus to all Singaporeans. For the first child and second child, parents get a cash gift of $8,000. For the third and subsequent child, the cash gift grows to $10,000.

You would also probably know that the Government provides a matching 1 for 1 when you deposit into your child’s Child Development Account (CDA).  This means that if you put in $1,000 into your child’s CDA, the Government will also put in $1,000.

At the same time, the government will also put in $3,000 in the child’s CDA under the CDA First Step.

The CDA can be used to pay for many things required to support your child’s growth and development, including medical fees and approved childcare and kindergarten services. The table below illustrates the CDA scheme.

Child Order

CDA Benefits

Total CDA benefits

CDA First Step

Dollar-for-dollar matching

1st and 2nd child

 

$3,000

Up to $3,000

Up to $6,000

3rd and 4th child

Up to $9,000

Up to $12,000

5th and subsequent child

Up to $15,000

UP to $18,000

Here’s how it works: When you set up your CDA account for your child, the Government will automatically deposit $3,000 into your child’s account, without you needing to do anything.

After this, you can deposit another $3,000 into the CDA to enjoy the matching bonus by the Government. If you put in $3,000, your child’s CDA will grow to $9,000 in total.

It works the same way for your third child, except that the dollar-for-dollar matching cap grows to $9,000. So, if you put in $9,000, your child’s CDA will grow to $21,000.

 

First Step Grant

Parent Saves

Govt matches

Total

1st and 2nd child

$3000

$3,000

$3,000

$9,000

3rd and 4th child

$3000

$9,000

$9,000

$21,000

5th and subsequent child

$3000

$15,000

$15,000

$33,000

 

Let’s assume you have opened your CDA account for your first child. By the time you celebrate his first month, he would already have $3,000 in his account under the First Step.

You would also have received your $8,000 cash gift from the Government under the Baby Bonus. If you made the smart decision that this money would be better served in the CDA, you will deposit $3,000 into the CDA.

Within weeks, you get a note saying that the Government has also deposited $3,000 into the CDA – making a total of $9,000 in your firstborn’s account.

If you decide to put your child in a full-day childcare centre, the money can help offset the fees. How long will $9,000 last?

Let’s look at fees charged by childcare centres run by anchor operators such as My First Skool and PCF Sparkletots Preschool. They have a monthly fee cap of $720 for a full-day service.

If you are a working mum, you will receive a basic subsidy of $300 and will end up paying only $420 a month for childcare. This means your child’s CDA can pay for some 20 months of childcare fees.

But there is more to the CDA than the grants and matching top-ups by the government.

The CDA funds also attract about 2 per cent in interest. It may not sound like a lot but the power of compounded interest means that it adds up over time – over seven years, that’s 14 per cent.

To look at it in another way, 2 per cent a year is four times what you get when you leave funds in your regular savings deposits (0.5 per cent), and higher than most fixed deposit rates.

That’s not all. After your child turns 13, the funds in the CDA gets transferred to an account called the Post-Secondary Education Account (PSEA).

Singaporeans can use the PSEA to pay for their own or their siblings’ education including undergraduate or postgraduate programmes at the universities, polytechnics, ITEs or other government approved private institutions.

And here’s the great thing about PSEA: It earns 2.5 per cent in interest, similar to what the CPF Ordinary Account pays.

Still unconvinced about the CDA as an investment tool? Let’s do a calculation on the financial returns of the CDA.

If you decide to save the $9,000 in your firstborn’s CDA and not use it for any expenses, it attracts an interest rate of 2 per cent over 12 years. When your child turns 13, the monies then get transferred to the PSEA. Over the next eight years, the money continues to grow at 2.5 per cent every year.

At the end of 20 years, what started out as $9,000 would have grown to $13,907.06, which works out to a rate of return of 7.97%.

Of course, this is a theoretical example as most parents would dip into the CDA at some point, be it for medical or childcare expenses. So the final effect of the compounded interest rates will be less.

But the fact remains that the interest rate on the CDA funds is higher than deposit funds and comparable to some insurance products, making it a viable option for saving for the child’s education.

The best part is: If you use the CDA for childcare expenses, you could continuously top it up – up to the stipulated limit – to earn the higher interest.

The CDA is just one of the ways the government is supporting parents. In fact, such support starts even before the child is born.

Parents can claim between $3,000 and $6,650 from their Medisave account to offset pre-delivery and delivery expenses, depending on the delivery procedure.

Each child also receives $4,000 of Medisave grant, which helps defray the child’s healthcare expenses, recommended vaccinations, hospitalisation stays and outpatient treatments.

To be fair, the numbers are not large and perhaps not much when compared to the total costs of raising a child. But every little bit helps. More importantly, managing your expectations will be key to ensuring that costs are within your limits.

Manage expectations

Every parent wants the best for his or her children, when it comes to food, clothes or experiences. But we can all be a bit more circumspect when it comes to spending on our children.

A friend told me that his uncle sold his flat so that his son could study business in the United States. My jaw dropped. It’s one thing to ensure that your kids have the best but there must be some limits.

In fact, the overspending starts much earlier. It’s not uncommon for parents to send their kids to expensive kindergartens that cost thousands a month.

My first child went to a church kindergarten which costs all of $100 a month. My second went to some school that’s more expensive – about $180 a month – a place where my third will also go to.

When it comes to university tuition fees, it’s simple: I will try to save enough for my kids to pay for an education at the local university. If things don’t work out, sorry kiddos, pay your own way. Take a loan, as thousands of people do. And then get a job to pay it off.

If my children want to go overseas, great. I will make sure that the money I have saved up is theirs but they have to make up for the difference whether through external funding, or by saving through work first. Daddy scholarships are passé.

At the very least, it will teach them about the value of money and the importance of hard work. It will also ensure that I will have a roof over my heads when I grow too feeble to work for a living.

In return, this is my promise to my kids: I will ensure that we will provide for our own retirement. Yes, we expect them to give us some money when they start work but I am making it a point to ensure that we are self-sufficient.

Some may say what I am advocating is easier said than done. When your child is pleading with you to fund her Australian education because she can’t make it here in the local university, it’s too hard to turn her down.

Nah. My message for my kids: Grow and toughen up. They can learn a craft, work first and go on to higher education later.

And my message for other parents: We will not always be here to take care of our kids. Let them stand on their own, the same way you let go of their hands when they wanted to take their first step. They may stumble and fall, but they will always get up and walk again.


The writer is a former business editor in a daily newspaper, who is now a founding partner of a content agency. His views do not necessarily represent those of Population.sg.

 


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