47) Reduce Impact of Foreign Currency Fluctuations on Education Funds

47) How you can reduce impact of foreign currency fluctuations for your children's education fund.

As a parent, you always want to give the best education for your children. You may wish to send your children to the best university you could afford. You may like the local universities, or you may prefer foreign universities.

If your plan for local universities, the education fees & living expenses are paid in local currency. There are no currency exchange fluctuations.

However, if you plan for foreign universities, then the education fees & living expenses will be in a foreign currency. The volatile foreign exchange rates could affect your education funds badly.

Let’s look at a sample of the Foreign Currency Exchange Chart for USD to RM.

Source: www.xe.com

The graph above is an example of USD to RM currency exchange fluctuations for the last 10 years. It had fluctuated between the low of RM2.937 to the high of RM4.496 to USD1.00.

It meant that the USD1.00 had increased 50% from RM2.937 (lowest) to RM4.496 (highest). A 50% increased would definitely impact the education savings badly. 

Let’s assume you wish to send your child to study in the USA. Current exchange rate is around RM4.30 to USD1.00.

The education fee is USD100,000. So, you have to prepare:

USD100,000 x 4.30 = RM430,000.

If the exchange rate increased to RM5.00 to USD1.00, you have to prepare:

USD100,000 x 5.00 = RM500,000.

The RM70,000 difference can be substantial as we are dealing with large amount like education fees.

In actual fact, the universities fees and living costs are much higher than USD100,000 for a university degree in the USA. 

So, one idea to reduce this impact is to invest in the country that you wish to send your child to. In this example, invest in the USA companies.

How?

As you invest in the USA companies, your investments are traded in USD. If the USD strengthen against your currency RM, you will gain on the foreign currency exchange. If you had invested USD100,000, then you will also gain the RM as well.

You may say that it is similar if you had opened a dual currency account. Yes, you are right.

One additional advantage of investing in Foreign companies stocks is that you can gain higher if the stock market goes up.

As you know, currently the USA interest rate is very low. Your USD currency account will not give you much interest income. You will miss out the potential gains from stock market as you did not invest in stock market.Also remember that stocks also give dividends as income.

What if you don’t know anything about USA stocks? You could be familiar with companies like Starbucks, Mc Donald’s, Facebook, Intel, Microsoft, Hewlett Packard, etc. Well, all of these companies are based in USA.

Then one possible solution is to invest in a Unit Trust fund that invests mainly in the USA.

There are many Unit Trust funds that invests globally. A Unit Trust Global fund normally invests in many countries. USA is the largest economy and has a lot of global companies.

So, you can invest in a US based fund or a Global fund to reduce the impact of the USD currency exchange rate fluctuations. 

Another advantage to invest in a Global Unit Trust fund is that you can easily and quickly switch the Unit Trust investments into a different country. The switching fee is very minimal as compared to dual currency account. The bid-spread difference is much more than the switching fees.

Switching of Unit Trust funds are also easily done. Most Unit Trust companies allow you to do the fund switching online. This means you can do the switching even while on holidays overseas.

Having a dual currency account also requires a larger amount as compared to Unit Trust funds. Unit Trust funds usually require only a minimum of RM1000 to start.

Similarly, you may wish to send your child to Australia for further studies. You can invest then into an Australia fund.

Please be reminded and be aware that all investments have risk. Do consult your professional investment and financial consultants.

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