Benjamin Franklin once said, ‘Investment in education pays the best interest.’
Unfortunately, many learners leaving school will not be able to afford tertiary studies as they do not qualify for free studies. According to Statistics SA, the rate of education inflation is about 3% above the CPI rate (see chart below).
Tertiary education fees
In order to afford tertiary studies, it is necessary to start saving for your children’s studies as early as possible – this is to utilise the effect of compounding on your savings/investment. The earlier you start, the less you will need to save monthly to reach your goal.
Starting earlier also provides a longer investment horizon, which in turn gives the investor leeway to invest in more aggressive underlying funds. Remember to also ensure that your monthly savings amount increases with inflation each year – you might have to synchronise this increase with your annual salary increase.
There are various factors to consider when saving for tertiary education:
You can invest the funds in your own name or in the name of the child. Ownership could affect the tax on the growth of the investment as the growth would be taxed in the hands of the owner. It is unlikely that the child would have a tax problem with the growth on the investment.
However, the risk of investing in the name of your child needs to be highlighted. The purpose of the investment is for tertiary studies, so when your child reaches the age of 18 he/she is no longer a minor and could decide to withdraw and spend these funds as they wish.
Type of product
Unit trusts on an investment platform are generally the cheaper product to use when saving for tertiary studies. There are, however, many unit trust funds to choose from, so getting advice from an investment professional or accredited certified financial planner will help you to select the correct funds. Exchange-traded funds and passive funds are generally the cheaper option, as the management fees on funds are normally low.
Tax-free savings accounts
Although this is an option, current legislation permits a maximum annual contribution of R33 000 per taxpayer. This limit might be a problem if you need to save more annually to reach your savings goals. The benefit of these funds is that the growth and returns are tax-free.
Education policy / Savings plan
The benefit of utilising an education policy or savings plan is that access to these funds is normally prohibited during the early years of the policy – so if you have a problem with financial discipline, this may work for you.
Whichever product you do select, remember to monitor or measure the growth of the investment every year. Be careful not to fall into the trap of switching funds, due to short-term underperformance.
Assisting your children in setting them up for adulthood by providing an opportunity to get a good education, is probably more beneficial for them and society than leaving them a large inheritance.