COULD PARENTS RESPONSIBILITY TO TAKE CARE OF THEIR CHILDREN BE CONSIDERED AS FINANCIAL INVESTMENT?

In Africa, there is this mentality that has taken deep roots in the minds of many people. This attitude is the belief that: ‘Taking care of our children is considered a financial investment”. There is a popular local adage that is translated as: “When your parents take care of you to grow teeth, you should also take care of them to lose their teeth.” Do you align to this saying?  This article discusses this particular saying, and shares views about if our children are supposed to be our investments for future benefits. Enjoy the read!

The normality is that, parents cater to the basic needs of their children, see them through education, until graduation, and securing a job, and this takes an average of twenty-five (25) years, per the Ghanaian educational system all things being equal.

To raise a child in the 21st century has become more expensive than it was in the past. According to a research conducted by the Bank of America Merrill Lynch, together with Age Wave, a consulting firm, in 2018, the average cost of raising a child to age 18 in the United States, was estimated to be over USD 230,000. Interestingly, this amount does not even include the cost of tertiary education. For Ghana, and many countries in Africa, there is a dearth of such statistics, but statistics from South Africa comes in handy. According to information published on the website of Financial Planning Institute of South Africa, research conducted in 2015 by Sydney Sekese, CFP? (2016 Financial Planning Institute’s Media Award winner), it costs around ZAR 90,000 a year, to raise a child in South Africa. However, the yearly costs to be factored in depends on the lifestyle, household income and attitude of the parent towards money. From the website, the main cost involved in the ZAR 90,000 per annum, were education, clothing, shelter and extracurricular activities. Supposing there is no inflation and change in cost of education, clothing, and shelter, even as the child grows, this would amount to over ZAR 2,250,000 (ZAR 90,000 * 25 years) by the time the child reaches age 25. The cost associated with raising a child is not on a straight-line basis. Rather, it is directly linked with the growth stage of the child. The cost changes as the progeny ages. Research has shown that in the first two years of the baby’s life, there is a big spike in expenses, it then flattens out, increasing slightly every year. Finally, there is a potential escalation in cost when the youngster is ready to pursue tertiary education.

As at 2018, South Africa had a GDP per capita (measured in constant terms using 2010 as the base year) of US$ 7,433 which is comfortably higher than Ghana's per capita of US$ 1,807 (Source: World Bank website). The cost of living in Ghana is expected to be less expensive relative to South Africa due to the Penn effect; goods and services being relatively cheaper in low-income countries than in higher-income ones. This is further corroborated by information collected for the 2011 International Comparison Programme. According to that information, Ghana and South Africa have a price level index of 59.7 and 84.8 respectively. Based on this information, we can thus, estimate that, the cost of raising a child in Ghana would approximate ZAR 63,300 per annum (59.7/84.8 * ZAR 90,000).

Over 25 years, holding price increases constant, a parent is expected to spend on average, ZAR 1,582,500 (ZAR 63,300 * 25) on their ward. With an average exchange rate of ZAR 2.81/GHS, this could potentially cost as much as GHS 563,000 (ZAR 1,582,500/2.81) to raise a child up to age 25. Discounting the total cost of raising the child into today's value, a parent would require an amount of GHS 167,000 in an investment account on the first day of the child's birth. With the amount earning an average 91-day T-bill rate of 15% per annum, the parent would therefore be able to withdraw GHS 22,500 at the beginning of each year to cater for the child till age 25. Taking the argument further, a family with two children would spend twice as much and another family with four kids, all things considered, would spend double the amount spent by the family with two children. The average cost of building a decent three-bedroom house in Ghana, according to meQasa.com is quoted as GHS 150,000. This amount is almost 90% of the cost of raising a child up to age 25. This means, the lump sum cost of education, and other basic needs borne by parents, can comfortably settle the cost of a three bedroom house.

After spending that much in catering for their children, most parents especially those in the middle to low income brackets, are left with close to nothing for investment towards retirement. Working parents particularly in the informal sector tend to retire with the notion that their children owe them returns (catering for them) for their investment (their responsibility towards their children). This way of thinking is not far from the rationale way of thinking. Moreover, funds spent towards catering for children represent foregone dreams and aspirations. This way of thinking is forced on kids when growing up, and can be a nightmare for the first child as the responsibility is known to be higher. Right from the moment the first child gains admission, he or she is tormented with constant reminder of this thinking and in some cases, that the responsibility of his or her younger siblings becomes a shared responsibility of which he is supposed to take a part. To double their odds of success, most parents in Africa resort to having large family sizes but the larger the family size, the higher the cost of raising children.

Earlier this year, I had the opportunity to attend a seminar on financial planning. The speaker spoke against parents relying on their children as their lottery ticket to financial breakthrough. During the Q&A session, one woman raised an important point which is common to many. She said, “I am a self-employed single mother with four kids. After paying my kids’ school fees and other important expenses, I am left with virtually nothing to invest towards my old age.” The woman thus concluded, that her children are effectively her gateway to financial comfort in her old age.

Perceiving your responsibility of catering for your children as an investment is a ‘risky venture’. The decision to live a comfortable life in your old age should not be based chiefly on returns from investing into your children. In the worst-case situation, your children should be a supplementary source of financial assistance. To live a comfortable life in old age, one should make a conscious effort to invest and plan for retirement. 

For such mothers and similar families, though the situation could be financially difficult, it is not financially impossible to save towards retirement. Let us form a hypothetical situation and do a little computation assuming a 25-year-old self-employed single mother with two children. (The emphasis is on a single mother because, quite unfortunately, that is the predominant family structure in Africa.) To prepare for the cost of her old age, let us estimate that our single mother is able to contribute an amount of GHS 1 a day for 25 years. By age 50, she would have contributed a total amount of GHS 9,125 (GHS 1 * 365 days * 25 years). If she accumulates this daily amount of GHS 1 into a piggy box and invests the total amount of GHS 7 at the end of each week into an equity mutual fund that earns an average return of 20% per annum, the future value would be GHS 265,713.74 by the time she turns 50. She would have earned an interest of GHS 256,588.74 (GHS 265,713.74 – GHS 9,125) over the 25 year period. If she decides to retire and live on this amount, every year she could earn a further interest of GHS 53,142.75 (20% * GHS 265,713.74) which is GHS 4,428.56 per month. The now 50-year-old single mother could live comfortably on a monthly income of approximately GHS 4,500 without withdrawing from the GHS 265,713.74 principal. This lump sum could eventually become an inheritance for the children by the time the parent passes on.

Another alternative, this 25 year old mother could explore is to set up an educational fund for each of her two children to cover their cost of university education. The admission fee for a freshman pursuing a Science related program at the University of Ghana for the 2018/19 academic year is approximately GHS 2,000. Factoring in the other tuition related costs, let us assume a total of GHS 6,000 is required to cover a child’s first year of admission. Projecting an average annual increase of 5%, this would increase to GHS 15,919.79 (GHS 6,000 * 1.05^20) by the time the child turns 21 and is ready to enter the university. If the annual increase continues at the same rate, the total cost of the four-year education would cost approximately GHS 68,616.27. However, the parent needs to have only a total of GHS 52,703.20 in an investment account on the child’s 21st birthday, if annual returns persist at 20% yearly. To save enough money to cover the cost of university education, the mother would have to save an average daily amount of GHS 0.54 at an annual rate of 20% over 20 years into an educational fund. At the end of every week, she would need to invest a total of GHS 3.81. And for two children, that would require an average of GHS 7.62. Alternatively, she could invest a lump sum of GHS 1,374.71 into an investment fund on the day of the child’s birth and leave it untouched for 20 years at the same 20% per annum. This would also grow to GHS 52,703.20, enough to cater for the child’s university education. To do the same for a second child, that would require a total lump sum of GHS 2,749.43.

The scenarios presented above demonstrate the importance of knowing the various investment vehicles that exist and the power of interest compounding. Unfortunately, majority of our parents are ignorant of this and wait until the last minute before they start to figure out how they would fund the educational needs of their children. Many brilliant wards have missed the opportunity to benefit from tertiary education because of the inability of their parents to fund their admission and tuition fees.

 In summary, if the single mother could invest an average amount of GHS 14.62 (GHS 7.62 + GHS 7) a week, she could provide for her children’s tertiary education and also secure her old age financially. When her old age is financially secured, she would become less of a burden to her children. Gone are the days when companies went to university campuses chasing students to give them jobs even while they were in their third and fourth years. Now, the job market is very competitive. It is not surprising to see some graduates still struggling to secure a decent job, for as long as five (5) years after graduation. Only a few graduates who are gainfully employed can boast of receiving a salary above GHS 2,000 a month. And if he or she is living in Accra, the cost of living could even outstrip the monthly income. As a parent, if such a child is your golden ticket to old age, then you are setting yourself up for disappointment. Moreover, the child would also have to settle down and start a family of his or her own and this could lead to more demands on his or her finances.

This principle is very crucial for the generation born between 1990 and 2000, we ought to learn this basic principle of investing towards our old age. It is important to note that consistency is very critical in the attainment of one’s investment goal, and not necessarily the amount invested. This is much prudent and wise, rather than relying on our children to take care of us in our old age. I propose we start a campaign towards educating all and sundry about the importance of planning and investing towards retirement. Educate them on the importance of interest compounding. There are a lot of investment vehicles on our market that can help you achieve your dream of planning well for your old age. Financial planning is not only the reserve of the elite in society, but everyone. The best time to have started saving towards retirement, was years ago, and the next best time is now!

To put it succinctly, the cost of raising a family is more expensive today than it was in the past and it would continue to rise even higher in the future. Let us do away with the idea of relying on our children as our financial security in our old age. Our children are our responsibility, not an investment!

Note: Percentages and exchange rates used in this write are based on assumptions. Actual results over the same period may differ from the percentages and exchange rate used.