Setting money aside for education is more important than ever.
If you have dreams of your child one day becoming a doctor or lawyer or pursuing their passions, it’s never too late to start saving. In fact, as soon as their child is born, a savings portfolio for their education funds should be part of any parent’s financial planning. While it’ll be a few years before they start school, or before you’re considering tertiary opportunities, with the cost of education expected to increase by about 9% per year in South Africa (education inflation runs at about 3% per year above general inflation), there’s no doubt that educating your child is one of your
most costly expenses as a parent. And because the education rate of inflation is so high, paying for their future education out of your monthly salary won’t be a feasible option unless you’re guaranteed a yearly 10% growth on what you earn.
Besides the tuition fees, parents also need to take into consideration their child’s future living expenses. Will they be studying away from home, and will you need to pay for a residence or rented accommodation? How will they travel to and from lectures? All these costs should be calculated and contemplated when saving for tertiary.
Donna Barnes, head of the direct channel at Nedgroup Investments says, ‘As a mom of two myself I’m constantly aware of the challenge of saving for my children’s education. Education is an ongoing liability so you’re actually saving for a moving target until your children complete their education (possibly right up until the end of university). This can be a very difficult goal to plan for from a financial point of view,’ she says. Donna urges parents to use the assistance of financial planners and online tools to establish exactly how much they need to save – and how best to go about doing so.
‘Parents do not need to figure this out alone – the experts are there to help, so use them,’ she advises.
Having an education plan or policy in place is probably the best financial option parents have when working towards this goal. It requires meeting with a financial advisor who can best assist with your current financial situation and make recommendations on suitable portfolios or savings account options.
Selecting a suitable savings investment strategy means that the growth you earn will significantly lower the impact of
education costs on your monthly budget, even if you miss the opportunity of starting your investment with the
birth of your baby.
Estimated cost of a four-year university degree or three-year technicon diploma in five and 10 years’ time, with required monthly savings to reach each goal (oldmutual.co.za):
The 10-year plan
For those with long-term tertiary savings in mind, starting when your child enters primary school is a great idea, giving you 10 years to build up the necessary funds for what a projected qualification will cost.
Investing in a tax-free savings account (TFSA) might be the best option for you and your family. With a TFSA, you can
make lump sum or monthly instalments up to the value of R30 000 per year with a maximum lifetime contribution of R500 000. This account also allows you to easily access your funds, stop or restart your payments whenever you like, and leave money invested for as long as you wish. What most people don’t know is that a TFSA can be a money market or fixed-term bank account, a unit trust investment or even a JSE-listed exchange traded fund, so depending on the risk and option you choose, there’s no limit to how much your investment can grow.
This is a great savings option for families who might not be able to put monthly contributions away but prefer to save larger lump sums, such as a tax rebate or Christmas bonus.
Keep in mind
While you can open an account under your child’s name, each individual in South Africa is only allowed a lifetime TFSA contribution of R500 000, so whatever part of that amount you invest into the account on their behalf will affect their own future tax-free savings contributions.
With a TFSA, you can make lump sum or monthly instalments up to the value of R30 000 per year with a maximum lifetime contribution of R500 000.
The five-year plan
For parents with less time on their hands, a five-year plan starting when kids enter high school is still an option, but requires greater risk to reap the rewards. In this regard, a unit trust might be the best option. A unit trust, or savings fund, groups together money from a variety of investors in diverse assets such as shares, bonds and property.
The diversity in unit trusts means your risk is displaced among various assets that are managed by investment professionals. Each trust is divided into equal units, with the price of each unit based on the value of all the investments in the fund. The amount you invest will determine the amount of units you can purchase. Over time, the price of these units will fluctuate according to the value of the underlying investments. Although exposure to market fluctuations means there’s some risk involved, the advantage is that you can access your money at any stage, increase or decrease your contributions, and add lump sums without incurring penalties.
Use the tools
Nedgroup Investments has recently launched a new online tool to assist parents with calculating the projected costs for their child’s education. The Extraordinary Life self-investing platform on Nedgroupinvestments.com calculates the monthly savings required based on a specific school or university’s tuition fees. It also adjusts the savings scenario if additional lump sum contributions are made periodically. By answering a few questions online, an investment strategy is determined that takes into consideration the timeframe until annual withdrawals take place, as well
as the investor’s risk tolerance. ‘Once the recommendation has been made parents can even change some of the variables such as monthly savings, effect of an additional lump sum contribution and timeframe to see how they impact the education savings goal. It’s a really useful way to get a realistic sense of how to start saving effectively for your children,’ says Donna.
FEATURE: TARYN DAS NEVES PHOTO: FOTOLIA.COM