Today I’ve invited Beth from Southern Charter to write a guest post around a topic that sits close to every parent’s heart when it comes to family finances: Saving for their child’s education.
Education is one of the most daunting costs parents face in South Africa. The reason being is that this cost increases roughly 50% faster than your earnings increase yearly. If you do the sums you will realise that education will slowly (or not so slowly!) eat away a greater portion of your income over time. Currently education inflation is at about 10%. Thanks to a weak rand this rate doesn’t look to improve in the near future due to the necessity to import books and materials.
Some steps to get ahead:
- Try to avoid paying for education from your salary
- Rather invest for it and start early.
- If your child is already at school, it’s not too late, just get started as soon as you can
- Know how much education costs and how much you need to put away to get there. Create a plan.
- Make short-term sacrifices. Tighten up the budget to ensure you set aside those funds
- Avoid credit, if you can. The compounding effect of interest works against you and can be crippling
- Have an efficient and appropriate investment strategy
Based on research done by Old Mutual the cost of education for primary, high school and tertiary education at a public school costs R1 million today, generally speaking. The cost is at least R2.2million for a private school. This cost is tuition only and excludes boarding, books and uniforms, which add up substantially.
As a practical example, if you want to pay for your child to do a B.com at UCT over 3 years, the cost for first year tuition in 2015 is R62500. Assuming your child is 3 years old today, education inflation is 10%, your monthly contributions increase by 10% annually and the return on your investment is 12% per year, you would need to contribute R929.74 monthly. If you waited until your child was 12 years old you would need to contribute R2527.11 monthly. This illustrates the power of compounding and the impact of starting early.
One of the most efficient ways to save for education is through unit trusts where your contributions and investment options are flexible, transparent and cost effective. Your time horizon is the most important determining factor as to which unit trust (or basket of unit trusts) is the most appropriate. If you have a long-term time horizon, the biggest risk you have is investing too conservatively and not allowing yourself the opportunity to outperform education inflation. This will result in needing to make larger monthly contributions.
The best thing you can do when planning to save for your children’s education needs is to seek professional financial advice. A professional will be able to devise and execute an education plan specifically suited to your family and how much time you have to get your savings on track!
About the Author: Beth Orchison is a Certified Financial Planner® working as a Financial Navigator at an established boutique wealth management company, Southern Charter. Her role is to help clients achieve their goals and dreams through investment management, tax, retirement and estate planning. Prior to Southern Charter, she worked for the Standard Bank group for 5 years where her passion for investments and people were further enhanced. Through life-long client relationships she has been privileged to have the opportunity to help, empower and ultimately make a difference in peoples’ lives.
For further financial advice you can reach her on firstname.lastname@example.org