Choosing to save for your child’s education ahead of your own retirement plan may be a risky strategy but it is understandable given the rising costs of education.
According to the Old Mutual Savings and Investment Monitor, 54% of South Africans believe that saving for education is more important than saving for retirement. That figure jumps to 66% for black respondents.
These figures come as no surprise as education costs have soared along with youth unemployment. Currently 51% of young South Africans are unemployed and according to the South African Institute of Race Relations (SAIRR), two out of every three young African women are unemployed.
Figures from the SAIRR show, however, that a tertiary education substantially increases your chances for employment. For example the unemployment rate for all South Africans who have not completed high school sits at over 32% compared to the national average of 25%; unemployment levels for those with tertiary education fall dramatically to just under 10%. What is interesting is that unemployment rates remain high for those with only a matric clocking in at 27% which remains above the national average.
What these figures tell us is that we need to be able to provide our children not only with decent schooling but also to enable them to study further. The motivation for parents to offer tertiary education is also financial as children who are unable to find work will remain dependents for longer – someone who remains unemployed at a young age has less chance of finding a job as they become older.
For parents this has direct financial implications – unemployed children will be dependent on you for longer, possibly well into your retirement. This is certainly not part of anyone’s retirement plan so it could be argued that ensuring your child has a good education, and therefore making them employable, is in many ways part of a holistic retirement strategy.
Rising costs of education
While parents want to provide the best education, the rising costs of education are putting an increasing strain on family finances. Figures from Statistics South Africa show that the costs of education have increased well above that of ordinary inflation. Since 1990 inflation for day-to-day living expenses have increased by around 7% a year, education costs, however, have increased by 13% a year. This five percent differential each year has resulted in a significant rise in education costs when viewed as a percentage of our salaries.
|Education costs as a percentage of income:|
|If you earned R10 000 a month in 1990 and spent R500 a month on your child’s education, you would have been spending 5% of your income on education.If your salary only increased in line with inflation you would be earning R44 000 today, however, the cost of providing your child with the same education would have increased to R7400 per month which makes up 17% of your income. This means that the amount you spend on education relative to your income has tripled!|
Jaco Gouws, Product Marketing Actuary at Old Mutual South Africa says if your child started Grade 1 at a public school this year, you can expect to pay around R450 000 for their 12 years of schooling, while a private school could cost around R1.5m, once uniforms, learning materials and extramural activities have been added.
A three-year degree at university will cost around R350 000 in fees alone, excluding travelling, accommodation and allowances.
Gouws says if your child is born today, you’ll need to save R1 500 each month for public schooling and a three-year degree, if you increase your premium with education inflation; and R3 200 each month if you keep your premium level.
To pay for private schooling and a three-year degree you’ll need to start saving R3 800 per month – that’s if you increase your premium to keep pace with education inflation, which is around 10% a year. But if you opt to fix your premiums, you’ll need to save R8 100 per month.
“That amount can seem terrifying, but it’s important to act, and to empower yourself with knowledge on education costs by using the new generation of online calculators,” says Gouws. To view the online planning tools for education savings go to www.smartmax.co.za
Strategies to afford your child’s education
Faced with these, quite frankly, terrifying figures what are parents expected to do? Something somewhere has to give and it usually happens in two areas: firstly parents sacrifice retirement savings and secondly they take on increasing debt. By having a strategy in place, you can find a way to provide an education for your child without ruining yourself financially:
Watch the debt: Many parents complain about the cost of education yet drive around in a R5 000 per month luxury vehicle. Your child’s education is far more valuable than a luxury car and education doesn’t depreciate! When you buy a house, car or take on any debt, do not do it at the expense of your child’s education.
Grow your savings painlessly: Use the Save More Tomorrow plan to boost education savings. In their book Nudge authors Richard Thaler and Cass Sustein recommend using some of your salary increase each year to boost savings. For example if this year you received a 7% salary increase, sign a debit order immediately to put 2% of your additional income into a savings account. Every year commit to increasing that debit order by a further 2% of your salary. Within five years you will be saving 10% of your salary without having to cut back on your spending. Another way to achieve this would be to commit to saving an amount that increases by a few percent ahead of inflation each year, for example a 9%-10% escalation on your monthly savings plan.
Set realistic goals: It is very difficult to save enough to pay for your child’s secondary or tertiary education in full. Rather target the growing gap between your salary increases and the increase in school fees, in other words have savings to supplement your school fees. You also need to save for the jump in school fees when your child moves into high school as the difference in fees between primary and high school can be as much as 20%. In fact, even primary school fees increase with each grade, over and above the normal annual fee increases. A Grade 5’s school fees tend to be higher than a Grade 1’s, for example.
Have a plan: A good starting point is to enroll your child in a school that you can afford on your current salary. Then as soon as your child starts Grade 1, immediately increase your savings by the difference between primary and high school fees. You will then be setting aside a realistic percentage of your salary for your child’s 12 years of education and the savings will supplement the annual fee increases in high school. For example if Grade 1 costs R1 000 per month but Grade 8 costs R1 500 per month, you need to save R500 a month from the beginning of Grade 1. Note this would be simply to cover future increases in school fees and not tertiary education.
Start a fund: Every parent needs to be saving towards their child’s education unless they plan on inheriting a large fortune. To boost those savings, ask family to add money to their education fund rather than buying birthday or Christmas presents. Children need an education more than they need toys.
Invest for growth: If you are saving for five or ten years before you will need the money, ensure that you invest in a fund that will grow faster than the increases in school fees. Cash-like savings will not be enough as they return around 5% at most compared to school fee increases of around 10% (see graph). Consider investing in a unit trust that has exposure to property and equity (shares). A balanced unit trust would be a good option and several unit trust companies offer investments from R200 to R300 per month.
Use the government bonus: This is a government initiative enabling you to save for a child’s studies towards an accredited qualification at either a public college or university. You’re paid an annual bonus on the investment which can be 25 per cent of the money you save annually up to a maximum of R600 per child. If you save R100 a month (R1 200 a year in total), you get another R300 a year. To receive the maximum bonus of R600 you have to save R2 400 in total a year. The bonus can only be used by the learner. You can withdraw your own money but will then lose the bonus. You can open a Fundisa Fund account at banks such as Nedbank.
Study loans: Most students have to consider study loans for tertiary education. Parents can assist by paying off the interest portion each month so that when the child graduates they only have to pay off the capital and not the accumulated interest. There are also government-assisted financial programmes such as The National Student Financial Aid Scheme.