There is one thing all parents have in common: a desire to give their children a better life, which means that saving for your children’s education is crucial.
We want our children to stand on our shoulders, and one of the best ways to do that is to give your child a good education.
To provide some context, the cost of university for a degree such as a BComm or BSC is around R52 000 a year.
But that is the cost in today’s value. If your child has just started school, they have 12 years before they start university.
Assuming education costs increase by around 6% a year, by the time they start university it will cost R103 000 per year which means a four-year degree will cost R454 000. If you had to break that down into monthly payments, you would be paying nearly R9 500 a month.
Start saving for your children’s education today
The good news is that if you start saving for your children’s education when they are still young, you have time for the power of compounding interest to grow the money for you.
If you save R1 500 a month and receive an average market return of 10%, you will have enough money to provide for your child’s tertiary education. You would only have contributed R230 000 over that period; the remaining R224 000 is all free money, due to the growth on your investment.
If you don’t have that amount of money available now, start with what you can afford and commit to increasing that contribution by 10% each year.
If you start with R900 a month and keep increasing your contributions by 10%, you will still reach your target.
Where to save
The next step is to decide where you should be saving for your children’s education. This all depends on when you will need the money. Once you know how long you are saving for, you can select the correct savings vehicle.
If you’re saving just to pay for next year’s school fees, invest in a product that will protect your capital. Any investment of less than five years should be in a high-interest bank account, money market fund or retail bond. While the interest earned would only be around 5% a year, your capital is not at risk in the short-term.
If you’re saving for your children’s education in five years’ time or longer, you will need an investment that can beat inflation. This would need to include exposure to the stock market through an investment like a unit trust or exchange-traded fund.
Over time, these funds can deliver average annual returns of 10% or more, but in the short term, stock markets can go up and down, which is why this is not for next year’s school fees.
You don’t need to guess which will be the best-performing shares, you just need a low-cost investment that will deliver market returns that compound over time.
Just remember, the earlier you start, the more funds you will have to educate your child.