Talk to any Malaysian parent and the conversation will inevitably come to the topic of their children’s education. To many Malaysians, sending their children abroad for their degree is something which many aspire to. The reasons for doing so vary from parent to parent, with some saying that they want to give their children the opportunities they never had, while others claim that the difference in quality of education plays a prominent role.
Perhaps the truth is more sinister. Sometimes I cannot help but feel that a sizable percentage of Malaysian parents are sending their children overseas with the sole aim of keeping with the Joneses, something I like to call “An Asian manifestation of the conspicuous consumption phenomenon”.
Yes, some Malaysian parents would go to great lengths such as selling their house and turning to loan sharks for the sake of their children’s education. These are the sacrifices we make in the name of our so-called “Asian values”. But are people really that altruistic? Are parents really willing to sacrifice everything for their children? What happens if we take the slightly cynical (but more realistic!) view that humans are innately selfish, and that there’s a little social status aspect in all of this?
Of course, there’s nothing wrong with sending children abroad, if you can afford it. Even if we admit that part of it is due to peer pressure from other, well-to-do parents, in the end, the children end up benefiting in the sense that it is in their best interests to allow their parents to finance their studies abroad. This might not be true, for example, if parents chose to spend the money on a bigger car instead.
But, what if the choice wasn’t between their children’s education and a car? What if the choice was between, say, their children’s education and an investment of RM270,000 in a condominium unit for rental purposes? Because that’s roughly the cost of sending a child on a 3-year degree in an average British city (excluding London).
Parents should discard their emotions and approach this issue from a financial perspective. A common tool used by financial planners is to consider the “net present value”, or NPV of their investment. In this case, we calculate the cash flows from their investment (in this case, the RM270,000 spent on their children’s education) and compare it to the next best alternative (investing the RM270,000 on two condominium units).
Anecdotal evidence* tells me that 2 in 10 overseas Malaysian students get overseas job offers after completing their Bachelor degrees. Another three opt for a Masters, PhD or professional studies. The other 5 thankfully are bright enough to find local jobs in Malaysia and do not contribute to our unemployment problem.
We assume that (you can skip these next few parts if you’re not interested in our assumptions but just want to know the results):
(i) The inflation rate is 4% a year.
(ii) Those working overseas earn RM125,000 a year after tax with a salary increase of 4% a year thereafter. (i.e. no increase in salary in real terms). Rents & unavoidable expenses are RM42,000 a year. We assume the child will work for 40 years before retiring. Note: For comparison, the average graduate salary in the U.K is GBP22,000 or about RM154,000 a year. Assuming a marginal tax rate of around 30%, this is approximately RM107,800 after tax.
(iii) Those working in Malaysia earn RM20,700 a year after tax with a salary increase of 4% a year thereafter. (i.e. no increase in salary in real terms). Rents & unavoidable expenses are RM4,800 a year. We assume the child will work for 40 years before retiring. Note: For comparison, the average graduate salary in Malaysia is about RM1,800 per month or about RM21,600 a year. Assuming a marginal tax rate of 25%, this is approximately RM16,200 after tax.
(iv) Those who opt for Masters, PhD or professional studies will have to pay an extra RM100,000 per year for another 2 years of education, after which they will have the same problem of finding a job. Again, anecdotal evidence suggests that 6 out of 10 get overseas jobs whilst 4 out of 10 get local jobs. We assume that their salaries are the same as counterparts with only a degree (which is not that unreasonable).
(v) We assume that sending your child to a local university will allow him to obtain a local job with 92% chance and will cause him to be unemployed with an 8% chance. The pay for a local job is the same as above and he will also work for 40 years before retiring. Note: This is close to the actual unemployment rate in Malaysia.
(vi) The cost of local university education is RM20,000. Hence the total amount to be invested in the condominium would be RM270,000 – RM20,000 = RM250,000. The long term rate of return for the condominium is 7.5% a year compounded continuously, including rents, expenses, maintenance, capital gains, and taxes. Note: This is a very reasonable rate of return, considering the after tax rate of return for low risk funds like Amanah Saham Nasional is around 6.8%.
OK, all the boring stuff are over, onto the results!
|Overseas Job||Postgraduate||Local Job||Total|
|After tax income (yearly)||125,000||20,700|
|After tax income – rent (yearly)||83,000||15,900|
|After tax income – rent (lifetime)||3,320,000||1,542,867||636,000|
|Expected after tax income (lifetime)||664,000||462,860||318,000||1,444,860|
|If opts for postgraduate studies;|
|After tax income – rent (yearly)||83,000||15,900|
|After tax income – rent (lifetime)||3,320,000||636,000|
|Expected after tax income||1,992,000||254,400||2,246,400|
|Cost of postgraduate studies||703,533|
|Expected after tax income minus cost||1,542,867|
|After tax income – rent (yearly)||15,900||0|
|After tax income – rent (lifetime)||636,000||0|
|Expected after tax income (lifetime)||585,120||0||585,120|
|Cost of local education||-20,000|
|Net amount saved||250,000|
|Net amount saved invested at||939,604|
|compound interest rate of 7.5% yearly,|
|assuming inflation of 4% yearly|
I’ve got the excel spreadsheet with me, but WordPress is not allowing me to upload it. Anyway, the result here is what is important:
The net present value of sending your child overseas is only RM1.4 million vs RM1.5 million if you don’t!
But wait, you say. Don’t most parents who send their children overseas are able to afford it anyway? Who cares if the difference is only a hundred thousand?
Not quite. Various pieces of anecdotal evidence which I’ve collected tells a very interesting story. For example, my mum tells me that one of her salespeople, a man in his late 40s who earns around RM2,500 per month, has sent his eldest son to study medicine in Russia. Admittedly, Russia isn’t the most expensive place to study in, but sources indicate that pre-med tuition fees alone cost USD$2,500. For the actual degree, it’s USD$3,600 a year for 6 years. For dentistry, a stratospheric USD$4,600 a year. That’s more than half a year’s salary.
But that’s not all. Because of the eldest son’s lack of knowlege about personal finance (thanks to our lousy schools) he managed to rack up around RM1,000 monthly in credit card debts due to mobile phone use and other excessive spending habits.
My mom tells me that this salesperson always comes to work everyday with a very sad face, like he’s carrying the burden of all of mankind’s sins.
That’s not all. Our neighbour’s son failed to complete his studies in Australia, costing his parents hundreds of thousands of ringgit with nothing to show at the end of it.
Before sending your child abroad, please teach him/her proper financial planning skills and assess his/her personality first. It’s highly unlikely that he will change from being a naughty boy to a good boy. If anything, it will probably be the other way round.
I speak from personal experience.
*Based on my very unscientific methodology of asking people I know
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