What does your child want to be when he grows up? Probably a princess or a superhero. But if, one day, she wants to be a doctor or a scientist, she’ll need a good education. Have you thought about what this will cost?
A good education is one of the most valuable things a parent can give their child. But according to Old Mutual’s 2015 Savings and Investment Monitor, 60% of urban South African parents are not actively saving for their children’s education. Education is costly though, and most people can’t afford to pay fees from their monthly salaries. Investing early can help you cope with the future cost of education, says Paul Roelofse, a Joburg-based financial planner. “Starting as early as possible will cost you less in the long run,” says Roelofse, who cautions against borrowing money to pay for education as the cost of the debt adds to the overall cost of education. Mark Lapedus, head of product development at Liberty Investment, says that if you delay saving until your child starts Grade 1, you’ll have to put aside almost two-and-a-half times as much every month.
Education is becoming more expensive, says Lapedus. It has a higher inflation rate than general inflation, averaging 9%, which is 4% above general inflation. So you need to take this and other factors into account, such as how much time you have. Compound interest, when the interest you’ve accumulated gives you returns, needs time to work. Realistically, says Roelofse, you’ll probably pay for the formative years of education from your salary, and set aside investments for the senior years. Think about whether you’re saving for school or university, and where the university is. Degrees differ in prices, with medical degrees costing more than a commerce or arts degree. Education costs also go beyond tuition fees and include items such as computer equipment, accommodation and transport. Your investments should cover these extras.
Picking a product
To save enough you need a suitable product, and discipline. Jean Minnaar, from Old Mutual Emerging Markets, recommends choosing investments that will give returns higher than education inflation. Unit trusts are a good option. Liberty describes unit trusts as investment products that enable you to invest in an asset class, such as equities or bonds, on the stock or capital market. Being exposed to market fluctuations means there’s risk involved, but you can access your money at any time, increase and decrease your contributions, and add lump sums without incurring penalties. Although there’s no fixed term, investments should be left for the medium-to-long term to get the full benefit of compound interest.
If you prefer a structured savings plan with limited access, an education savings policy could work. There is a minimum and maximum investment period and often a penalty if you cancel the policy before maturation. By law, you’re allowed one withdrawal within the first five years, and one annually thereafter. In the event of death or disability of a parent, Old Mutual says many policies offer the optional waiver of payment benefit, when the institution continues with your payments for the remaining period. Lapedus says savings policies work better over a longer period, so he advises setting one up when your child is born.
Another useful place to save is an access bond, says Roelofse. This type of home loan gives you access to the money you’ve paid into the loan, over and above your required monthly instalments. Paying in extra lets you pay off your bond quicker and gives you access to the cash. The rate of return is the same as the rate your bank charges. But, due to ease of access and flexibility, you may find yourself dipping into your bond for unnecessary expenses. Be disciplined.
Tax-free savings accounts let you access your funds at any time and you don’t pay tax on the growth of your investment. Old Mutual says no dividend, capital gains or income tax is payable if you remain within the annual threshold amount of R30 000 and lifetime limit of R500 000. You can open a tax-free savings account for each of your children, so a family of four can save up to R120 000 annually. When contributing on behalf of your children, though, it’s important to consider the implication of tax deductibility of donations. You can make a lump sum or monthly instalments, access your funds at any time, stop or restart your payments whenever you like, and leave money invested for as long as you like. But if you don’t stay within the annual and lifetime limit you’ll pay a hefty penalty.
Student loans may leave your child with debt straight out of university. But they’re an option when it comes to ensuring your child gets a good education. For children studying full-time, parents will probably need to stand surety, and pay off the interest and fees. Once children have finished studying and secured a job, they can start repaying the loan. Whichever option you choose, you need a plan. Start now, and revisit your plan annually. You can adjust it to accommodate rising costs, or revisit whether you’re saving for school or university. But without a plan, your child may go without the education they deserve.
Disclaimer: This article is intended to provide a starting point for saving for your child’s education. For financial advice, speak to a qualified financial advisor or financial institution.
The cost of education
Old Mutual’s cost estimates for one year’s education in 2016, 2021, 2029 and 2034.
• Primary or high school – public R29 000
• Primary school – private – R71 000
• High school – private – R114 000
• University – R50 0002021
• Primary or high school – public R45 000
• Primary school – private – R109 000
• High school – private – R176 000
• University – R77 000
• Primary or high school – public – R90 000
• Primary school – private – R217 000
• High school – private – R351 000
• University – R154 000
• Primary or high school – public – R139 000
• Primary school – private – R334 000
• High school – private – R540 000
• University – R237 000
1. Have a plan: work out estimated costs, pick an investment and invest monthly.
2. Schedule your debit orders to go off at the beginning of every month.
3. Check what guarantees are offered.
4. Ensure children are covered in your life insurance policies, or are beneficiaries of any other policies.
5. Consult an accredited financial adviser for ongoing advice and guidance. This does come at a cost, but Roelofse suggests you consider this in terms of the value of the advice you’re receiving. Advisors should be licensed by the Financial Services Board.
6. Ask family and friends to contribute towards your savings plan on birthdays or special occasions.