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5 tips for saving for your child’s education

Education inflation continues to outpace headline inflation.

A recent Discovery paper shows that the average cost of private schooling can easily top R1.5 million per child.

Phase of school

Number of years

Cost of each year

Crèche

3

R30 000

Pre-primary

2

R60 000

Primary

7

R90 000

High

5

R100 000

Tertiary*

4

R45 000

Tertiary residence

4

R25 000

* Average public tertiary education costs

Source: Discovery Life

Yet, according to the Old Mutual Savings and Investment Monitor 2017, 56% of South Africans are not saving for their children’s education.

While quality education is key to unlocking South Africa’s growth potential, it can also significantly improve a child’s career prospects. According to the Institute of Race Relations, the labour market absorption rate depends largely on a person’s level of education. For people with a tertiary qualification, the absorption rate is 75.6%, whilst it is only 50.3% for people with matric.

Claire van Wyk, financial consultant at Discovery, says due to tough economic times very few people manage to save enough for their children’s education. South Africans are not known as a nation of savers and emergencies may make it difficult to stick to a savings plan.

Against this background, here are some tips for investors who want to save for their children’s education.

1. Start early

South Africans should start saving for a child’s education as soon as possible – even before the child is born.

Van Wyk says investors should also consider when they plan to have a child.

In a lot of countries women are having babies later in life. At Discovery Health, the average age of first-time mothers is 30. According to the Office for National Statistics, more babies were born to mothers older than 35 than younger than 25 in 2014 in the UK.

Some people argue that you have more time to save if you have a child later in life, Van Wyk says, but it also means you become accustomed to more luxuries and will likely need to cut back spending.

“Start saving early. You cannot discount the importance of compound interest.”

Rather than buying big Christmas gifts or birthday presents, grandparents can also play a part by signing an investment debit order for education purposes, adds Magnus Heystek, investment strategist at Brenthurst Wealth.

2. Consider the type of education

There is a perception that private education is exceptionally good, but the difference between private and public school fees may not necessarily justify the added financial burden. Parents need to do their homework, says Martin de Kock, director at Ascor Independent Wealth Managers.

Also decide which universities or tertiary institutions you want to send your children to, calculate what the cost will entail and use this as a point of departure, adds Van Wyk.

3. Consider ownership and the type of investment

De Kock says a lot of people prefer to invest money in the child’s name, but it is important to keep in mind that once the child turns 18, he or she can technically use the money for anything – not only for tertiary education.

Therefore, he usually suggests that parents invest funds in their own names.

Parents could also consider a tax-free savings account, which allows annual contributions of up to R33 000 and a maximum of R500 000 over an individual’s lifetime. All the investment returns earned in the accounts are 100% tax-free and the money can be withdrawn at any point.

Depending on the parents’ specific circumstances, De Kock says he usually suggests the use of unit trusts, preferably low-cost exchange-traded funds.

There are also products that are specifically tailored to educational needs that investors could consider.

But whatever investment vehicle parents choose, it is imperative that the underlying investments should have sufficient exposure to growth assets and that it should not be invested in a money market account for the long haul, he says.

This is important to ensure that the investment grows ahead of inflation over time. According to Statistics South Africa, education CPI has consistently outpaced the headline consumer price index (CPI) between 2009 and 2015.

4. Consider payments carefully

Some schools offer discount if school fees are paid upfront in advance, which could provide some relief to overburdened budgets, but De Kock says if parents need to borrow money to pay fees in advance, it probably won’t be worthwhile unless the discount is substantial.

Rather consider using part of your December bonus to pay fees in advance where it makes sense, he says. Also keep in mind that when school fees are paid in advance, it will provide some relief in your monthly budget.

5. Plan for the future

While risk cover is generally a grudge purchase, parents should plan for the possibility that they may die or become disabled and that they may not be in a position to earn a monthly income, typically by purchasing life and disability cover.

De Kock says disability cover usually pays a lump sum whilst an income protector will pay a monthly income.

Apart from an income protection policy that can cover monthly expenses in the case of disability, it may be a good idea to also provide for a capital lump sum that can be invested for the benefit of kids who still need to attend school and university or college, he adds.   

Testamentary trusts are often set up in a parent’s will to hold assets on behalf of minor children and to provide for their education when parents die.

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Firstly REMEMBER If you have debt, your debt interest AND (usually) your debt interest rates are higher than the return on your education savings plan. Work on eliminating your debt. Paying your bond off in 7 years gives a +- 180% return on your money. AND without a home bond you will have school fees. Just a tip from Dr. Debt!!!!

Tip number 6. Move to a civilised country. Pay tax there. Enjoy free education.

cheaper route : move to the service area of a top public school, even if it means moving towns

my kids went to a very good IEB and we were very satisfied. BUT there are state schools that are better than many private schools

Just don’t take the opposite bizarre logic: pay private school for state exams like a few in the Cape do / I think Bishops or SACS for example.

How about don’t rush into having a “baby”. The baby stage only lasts a few months and you are saddled with a very expensive drain on the family resources, time and money. Make sure you are prepared financial and in terms of lifestyle before starting down this route. For the same reason consider carefully having more than one. The world is cluttered with under qualified people, if you what your child to have a reasonable future you have to be prepared to pay for a sound grounding.

I do not understand why experts keep on flogging a TFSA as an education savings vehicle.

So you contribute about R200 000 into that account, then withdraw the R200 000 plus growth from it to pay for the education.

Then Johnny comes to daddy and ask why can he only save another R300 000 towards his retirement?

In my view, a TFSA is for retirement only, with the benefit of accessing the money if need is really there due to unforseen circumstances. It is not a medium term and education savings vehicle

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