Things to Know About College Fund Saving with the 80-20 Rule

Published: June 22, 2015 | Updated: July 27, 2020 | Posted by: Carlo Miguel Castañeda | Personal Finance

the 80-20 rule
When you become a parent, the question of securing your child’s future education rears its head. You want to give them the best education that you can. With this comes looking at how much it will cost to eventually send them to the university of their choice. With that in mind, you’ll be looking at ways to save the money for your child’s education fund.

There are plenty of ways to save, and the first step towards that is to create a budget. One style of budgeting that doesn’t require as much effort is the “80-20 rule”.

What is it?

The 80-20 rule is a saving formula based off of Pareto’s Principle, or “the law of the vital few.”

Proponents of this formula, Harvard economist Elizabeth Warren and her daughter Amelia Warren Tiyagi say that “You should base your budget on your ‘take-home’ income, after taxes and other expenses are taken out of your paycheck.”

How does it work?

This saving formula simplifies the saving process by splitting off 20% of your income into savings. The remaining 80% is allocated 50% for your needs, and 30% for your wants.

While it may be difficult to separate needs and wants, the 20% you take away from your monthly income is an absolute for when you are saving for your child’s education. On a “take-home” income of PHP 50,000, the amount that goes into your child’s education fund each month is PHP 10,000.

This amount, multiplied by 15 or 16 years, will give you a total of PHP 1.8-1.92 million. The possible costs per year exceed this amount, with the average costs for a year getting closer PHP 1 Million. This means that simple savings won’t be able to provide for your child’s entire schooling.

How do I grow my college fund?

What’s important when it comes to saving is that you start. Saving must become an automatic part of your process each time you receive your paycheck. From there, you have many ways to grow the 20% you save each month into a viable source for your child’s college education.

There’s no shortage of ways to further the growth of wealth. In most cases, the best option is an education plan. Most education plans feature a small first investment amount, usually around PHP 20,000. Essentially, two months’ worth of savings will allow you to start building the fund.

Many companies that offer education plans also provide ways of growing the fund beyond the minimum requirement for your child to complete their degree. Some of these products include a life insurance policy, or further investment growth options.

The rule of thumb when looking for a way to grow the 20% you save each month is to do your research and shop around for your preferred investment product.

It is also important to teach your child the value of an education and the importance of knowing how money works in their lives at a young age. A money-smart child results in a financially aware and independent adult.

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