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A university education for R500 a month

The cost of tertiary education scares me almost as much as much as the speed at which university-related expenses escalate each year.
As with all investments, the joys of exponential growth come from the power of compounding, which comes from starting early. Image: Shutterstock

Those of you who have stuck it out and put up with my ramblings over the last four years may remember an article I did in 2016 that covered how we were planning on investing for our son’s university education.

The cost of tertiary education is something that scares me almost as much as how fast university-related expenses are escalating each year, so I wanted to start putting money away towards this expense as soon as possible. I set up an account pretty much the month he was born.

Well, the months have ticked by and the years flown since then. Our son is almost four, and our initial R500-a-month investment has been doing its thing in the background.

I recently logged into the account to check how things were going.

I was pleasantly surprised!

Here’s a screenshot I grabbed.

Source: Stealthy Wealth

Not too shabby – the account has enough to cover more or less one years’ worth of university tuition, and this before my son’s fourth birthday.

A simple linear extrapolation shows there should be enough in this account to cover a four-year course before his 16th birthday (but of course this money is more likely to grow exponentially than linearly, and I am expecting the extra money bunnies that creates to help cover stationery, books and beer too!).

And now I can already hear the questions – is this a tax-free savings account (TFSA)? Where is the account? What did I invest in?

Okay, let’s tackle them one by one.

Should you use a TFSA?

Well, this is a personal choice – but here’s the way I see it.

In short, there were three options available for us to use for our son’s university education investment:

  1. Invest in a normal account in my son’s name
  2. Invest in a TFSA in my son’s name
  3. Invest in an account in my wife’s name

Here is how I evaluated each option.

A normal account in my son’s name

I didn’t like this option – it meant that not only would the account be taxable, but it also meant that my son would have full control of the account on his 18th birthday. As much as I would like to think that I will raise a financially savvy kid, I would hate to see 18 years of disciplined investing get blown on a night in Vegas.

A TFSA in my son’s name

I didn’t like this option either because it also meant the account would be accessible to my son on his 18th birthday. But not only that, making contributions to a TFSA in his name would mean that we would use up some of his lifetime contributions, and even if he did use the money for university, he would not be able to use his full annual lifetime contributions if he wanted to use a TFSA to save for his retirement.

A normal account in my wife’s name

This is the option we went with. By having the account in my wife’s name, we could make sure we use the money for its intended purpose – three to four years of raucous-partying-with-a-sprinkling-of-exams quality education.

Yes, there may be some tax implications doing it this way – but that is why the account is in my wife’s name and not mine.

My wife is in a lower tax bracket than me, so any tax she ends up paying will be much gentler than if it were in my name.

But this is probably a non-issue in any event – I suspect the current capital gains tax (CGT) exemption of R40 000 will be enough to keep us from paying any CGT on the investment.

Where is the account?

We opened the account at EasyEquities – no annual fees, no minimums, super-cheap brokerage and the full range of exchange-traded funds (ETFs) to choose from. In my view it doesn’t get better than that.

If you want to do the same, opening an account at EasyEquities is pretty straightforward (I did a full blow-by-blow in this post).

What are we investing in?

In my view, you can make investing for your child’s education pretty complicated pretty quickly – for example, the education policies you might have seen are made to sound totally legit (I mean, they even have education in the name!). But these are usually just a fancy name for what is likely a complicated and fee-loaded endowment structure with expensive underlying investments that are more likely to send the provider’s/financial advisor’s kids to university than your own.

For me, a long-term investment like this is as easy as choosing the cheapest and most diversified ETF – the Satrix MSCI World (read more on why I like it so much here). Since this investment is for the long term (still around14 years to go) I am happy to just buy that and let it run.

As my son’s university date gets closer I may start selling out (while at the same time harvesting some tax using the annual R40 000 CGT exemption) and move the investment into something more defensive like cash. But I haven’t given too much thought to that for now. That is me-one-decade-from-now’s problem to deal with.

Investing for multiple children

Okay, and what about my other son?

Well I am doing the exact same thing – the Satrix MSCI World ETF in an account in my wife’s name.

Source: Stealthy Wealth

As you can see, he is still in the I-have-just been-born and parents-sleep-is-overrated phase of his life, so we are just getting started with this account.

The reason we opened separate accounts?

I guess having two separate accounts makes it easier for me to account for and track. And since there is no additional cost for having multiple accounts at EasyEquities, why not?

So that’s pretty much our way of planning ahead for possible University expenses in the future. I would love to hear if anyone else is doing something similar, or if you have a different approach? Please share your thoughts in the comments.

(Oh, and by the way – if you want to start planning and investing for your own children, you may find this article and free calculator download helpful.)

COMMENTS   15

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I take my hat off to people that still have children in these times. I don’t understand why you have children, but I salute you nevertheless. Advantages of having children = 3 or 4 reasons. Disadvantages of having children = 30 or 40 reasons.

I don’t mean to sound like that pessimistic jerk who always knows better, but I think you’re plan is a little too optimistic. Did you consider:
1) Cost of residence fees and meals?
2) Cost of books
3) Cost of transport (and a car?) if your kid would like to study further away from home?
4) Other lifestyle expenses (parties, excursions, etc.).

Of course, a lot of this privelege and you could avoid some of it (like parties). I suspect you should be aiming for R100k per year in today’s money.

But another factor to consider (at this risk of sounding like a disgruntled expat) is the quality of education in SA. Barring maybe a few good departments scattered around the coutry, it is really shocking to see the decline and I have little hope for improvement in the time our children enter the univeristy gates. Thus, I would propose saving for an international education, and if you plan properly this could save you a lot! For instance, Germany offers almost free University education to everyone – even international students. The only trick being you need to have a reasonable German speaking ability which you could learn at school as an additional subject. Belgian universities are also quite cheap and in the Flemmish areas closer to Afrikaans if you were that way inclined.

Anyway, some things to consider. As you may gather these things keep me awake at night.

Good article nevertheless!

Danie, good question. But unfortunately some things in life cannotbe quantified or reasoned (takes a for me to say this as a hardcore engineer :)). It really is a great little project to build and enetertain these young creatures.

It’s the same as hobbies like golfing, hunting, or biking. It really doesn’t make sense on paper why someone would spend so much money on such a meaningless little excercise but it gives people a lot of joy. I am sure you have some inexplicable little hobby that drains your bank account?

WAiste of money.no wife and kids thanks.

You have forgotten that SARS has stealthily upped the CGT rate on shares, from 20% previously, to 40% as from March 2020 (individuals), for those Capital gains beyond the threshold of R40000 in gains.

The 40% is more than what my marginal rate was as Salary drawer (36% at the time).

I had missed that one… Are you serious? So on immigration with forced sales you going to get properly done in…

Take all the risk with after tax money, and only just more than half the upside… This truly unconscionable…

Nope. What you’re quoting are inclusion rates, not tax rates. At a 40% inclusion the effective CGT rate is 40% of your marginal rate.

Not quite – the inclusion rate is 40% not the tax rate. What this means is that 40% of the profits will be taxed at your marginal rate. So the top tax payers (45% bracket) will pay 18% (45% of 40%), which is the highest CGT rate you will pay.

If you in the 36% bracket, you will pay 0.4×0.36 = 14.4% after the first R40k of profit.

More info here – https://twitter.com/stealthy_wealth/status/1272404753532805121?s=20

I was referring to the inclusion rate, that is 40% now, but only applicable for CGT on Share capital gains. CGT on other capital gains, as far as I know, the inclusion rate is still at 20%. The first R40000 is still there as an exclusion, whether it’s capital gain on the sale of shares or any other asset class. Check SARS web site out. The latest (2020) document is there.

I’ve previously seen the sentiment expressed in the article that if a parent contributes to a child’s TFSA, then “we would use up some of his lifetime contributions”. How on earth does one come to that conclusion? The lifetime contribution is currently R500 000. What difference does it make who contributes? How does the parent’s contribution prejudice the child? I must be missing something. I’ll be pleased to be enlightened.

It’s only an issue because the TFSA will likely be spent before the child turns 23, while denying it future access to this product, and the potential for long-term compounding tax-free returns.

Otherwise, it would make total sense to have the child’s TFSA fully loaded with share market index funds by the time they become a teenager, and then let it grow tax-free for another 50 years. R500,000 growing at 9% pa on average would be worth R37m after 50 years. Of course, if you strip out inflation of 5% pa, it would only be worth R3,6m in today’s money terms, but still, a tidy sum.

The difference in this case is that it’s destined to be spent during student years, and therefore part of the child’s retirement funding (with a much longer accumulation period) will have to be something less tax-efficient.

How did you go about opening two (possibly 3) accounts in your wife’s name at EasyEquities (EE)?

I am assuming here that she has:
1. Hre own Account
2. First son’s uni account
3. Second son’s uni account

I was under the impression that with one ID no. you can only open one account at EE?

I don’t know you stealthy wealth, so perhaps you’re lucky enough to be able to ignore this…

But what happens when you arrive at the varsity for registration and you’re stopped by the sign that says “net swartes”? (I don’t think that’s derogatory in any way, it’s just the realities of the law.)

Like my kids were when trying out for sports. Like my friends kids were when trying to register for varsity?

I say, as long as your money is accessible and not in education funds, you should be okay. Least then, your kids will be able to take the money and use it to start up an underground, black market type company. Or pay for an investment visa.

I am putting my 4th child through uni now. Over 10yrs the total cost has escalated from about R60k py to over R150k py. So increase that R500pm a bit I’d say…

End of comments.

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