A money plan for your child’s education and future
It’s never too early to start saving for your child’s education and their financial future. In this article, teacher and parent Kerry McArthur, with the help of financial advisor Stephan Fourie from Benchmark Capital Group, explores some options to help you save enough money to give your child a quality education.
Starting a family is an exciting time – planning the theme for your baby’s room, choosing names, and making many other happy decisions. One reality that needs to be faced early on, however, is that of your child’s school and university career, and how you’re going to pay for it.
With the global economy in a very volatile state and costs continuing to rise, you may feel overwhelmed when thinking about how to plan for your child’s (and your family’s) financial future. Arm yourself with the facts, then work logically to meet the demands of your child’s educational needs.
Saving is the key
The cost of education and its annual increases are generally about 3% above inflation (CPI), which means that the cost of education is rising more than salaries and other income. In order to mitigate this, the primary action you can take is to start saving money. How you save your money will determine how far these savings go.
Start small, but start
You don’t need to start your savings by putting away a huge amount, or think that you need to sacrifice a huge chunk of your monthly income to your savings account. Start small, but have a vision of long-term financial growth.
It will also help to set up a separate medium-term emergency fund. This will ensure that you don’t have to cut into your long-term savings if you suddenly find yourself with a major expense or without a steady income. Your emergency fund can be built up slowly but steadily, and should equal six months’ income. This emergency fund should be kept in a separate savings or investment account that isn’t immediately accessible.
Begin saving a small amount – something easily affordable and slowly increase the amount every month until you are saving what you need to. Shop smarter, forego frivolous purchases, and you will notice quite quickly that your budget can handle these increased savings; then adjust your lifestyle around your new financial priorities.
What to save for education
By 2029 – just 12 years away – the cost of education will have risen exponentially. To save for schooling and university, you’ll need to put away about R2 160 per month, which then needs to be increased by about 9% per year with a 9% growth on your investment.
Currently, the average primary school will cost in the region of R29 000 per year; secondary school is an average of R35 000; and tertiary school is R40 000 per year. By the time a current preschooler goes to school, the costs will be in the region of:
- R48 640 per year for primary tuition (in 2023)
- R90 320 per year for secondary tuition (in 2028)
- R145 700 per year for tertiary tuition (in 2032)
The kind of saving you’ll need to do will be based on the type of school you want your child to attend (private or government), which extracurricular activities your child is interested in, and of course the uniforms, stationery, school trips, and other related costs.
How or where to save
There are many different saving vehicles (or methods), but the ones you choose will be based on your specific needs. Dedicated education policies comprise just one of your savings options, while others include:
- Money market accounts
- A money market account is a cross between an investment account and a savings account. It earns a bit more interest than a normal savings account, but it won’t necessarily have good enough returns to keep up as they provide returns close to inflation.
- There is a minimum investment amount which depends on the bank you save with and your money is available immediately if you need it.
- Currently the return on a money market fund is 6%.
- A traditional bank account
- A normal savings account is not always a good option because interest rates are low and you may get returns below inflation.
- There is no minimum deposit for a traditional bank account and your money is available immediately.
- Bank charges can often chew up your savings portion before it can grow.
- This is a unit trust investment for families who earn less than R180 000 per annum, and the savings are specifically for education. It does have a bonus offering for each year in which you save, but it is not guaranteed.
- The return on this investment is linked to the amount of money you save and the underlying investment portfolio.
- The risk with Fundisa is that it may not generate enough money in the long run.
- Investment Policies (Education policies)
- This type of investment is a lengthy commitment to save a specific amount every month, which will increase periodically. It is a very structured approach to saving, with very limited access.
- There are no guarantees on favourable returns and the costs can be quite high. However, with it being less flexible, it avoids the money being used easily during the period of investment.
Teach by example
Start teaching your children about the importance of saving money from as early as possible – good financial habits can last a lifetime. A seemingly simple concept such as a money box will go a long way to helping them plan how they will use their pocket money, especially if part of their money is always allocated to savings.
The earlier you start saving, the more affordable your child’s education will be. And it need not be a huge investment – consistent small investments made over many years can amount to enough available funds for your child’s future through their education. This investment will carry further into your child’s future career, family, and financial stability as adults.