Saving for your child’s education

When you consider what it will cost to educate your child, it’s easy to fall into a flat panic. Episode 11 of the Change in your Pocket series looks at ways to save for your child’s education.

– Video supplied by BrightRock

Welcome to The Change Exchange where we are exploring ways to make our kids more financially savvy.

In the last few episodes we discussed landing that first job and buying your first home. But what about educating your child? Keep this in mind:

If your child were to be born today, and you were to educate them in a model-C school and send them to four years of tertiary education, you’re looking at about R2 million worth of school fees. So it’s best to start planning!

When starting a savings plan for your child, you need to be realistic about what your goals are. It would be very difficult to save enough money during the first seven years of their life to fund 12 years of education.

Rather focus on meeting that gap between school fee increases and your salary increases, as well as meeting the cost of extras like books and school tours.

When I talk about “the gap”, I mean that gap between your pay rise and the increase in your school fees. It’s likely that school fees will increase by more than your salary each year.

Education costs have risen by between 9% and 10% each year, but salary increases have not matched this figure. If you earned R10 000 a month in 1990 and spent R500 a month on your child’s education, you would have been spending about 5% of your income on education costs.

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 R7 400 per month which now makes up 17% of your income. This means that the amount you spend on education relative to your income has tripled!

It is this gap that creates financial difficulty, so your first goal is to save so that education costs do not take a bigger bite out of your household finances each year.

Your second goal is to fill the gap between high school and primary school fees, as you will be paying around 20% more once your child starts high school. Even primary school fees often increase with each grade, over and above the normal annual fee increases.

So let’s break this down into a plan. If your child has not yet started school, calculate how much you will be paying for his or her school fees each month and start saving that amount now. In this way, you will get used to living on a budget that includes school fees while building up savings.

If your child has started school, immediately increase your savings by the difference between primary and high school fees. In this way 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.

So you have a plan, but where should you be saving? The first question you need to ask is “How long will I put this money away for?” Once you know how long you are saving for, you are able to select the correct savings vehicle.

Short term: If you’re saving just to pay for next year’s school books, invest in a product that will protect your capital. Any investment of two years or less should be in a high-interest bank account, money market fund or retail bond.

Longer term: If you’re saving for your child’s school fees in five years’ time or longer, you’ll need an investment that can keep up with inflation like a unit trust or exchange traded fund that invests in shares on the JSE. Also take advantage of tax-free savings vehicles which you can open in your child’s name.

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