This is how you can put money away for your children’s studies

By DRUM Digital
23 October 2017
PIC: Supplied

PIC: Supplied

EDUCATION is the best gift you can give your children, but will you be able to afford to pay for their studies one day?

Just putting food on the table is enough of a challenge for many South African parents, and for them tertiary education is a big financial worry. And it’s no wonder: In 2017 the projected 9,5% increase in the cost of education is higher than the estimated inflation rate of close to 6%.

That means that parents whose children are in Grade R this year can expect to pay a total of roughly R1,33 million (public tuition) or R3,01 million (private tuition) for their children’s education, according to the latest figures from the Old Mutual Savings and Investment Monitor. The two figures are for 12 years at school plus a three-year university degree.

Should your child want to go to university it can cost you on average R54 000 a year now, R85 000 by 2022, R176 000 by 2030 and R253 000 by 2035. These predictions are based on an annual estimated inflation of 9,5% – and this figure can be even more. Sadly 54% of urban South Africans aren’t saving actively toward their children’s education.

START EARLY AND REAP THE BENEFITS

The ideal is that you need to start saving for each of your children’s education when they’re born, says Nico Swart, a lecturer at Unisa and author of the book Personal Financial Management. He says compound interest (interest on top of interest) “is the most important investment principal”, so the longer you can keep the money invested, the better.

If you’re thinking of starting a family you can start an education investment even before your children are born, says Warren Ingram, renowned asset manager and writer of Become Your Own Financial Advisor. Swart says if you can afford it, “put about R1 000 away every month and adjust for inflation by adding 10% every year for 18 years. Thanks to compound capital growth it can grow to be a considerable amount of money over 18 years.”

“Parents can start early and small and then grow their investment,” says Grant Locke of OUTvest, the new online investment platform recently launched by OUTsurance. “It’s far better to start with say R200 a month and then increase it from when your child is young than to start with R1 000 a month but to stop contributing after a few months because you can’t afford it. Money that’s meant for education needs to grow and will over time contribute a large amount to your child’s future.”

OUTvest offers the Crowdvest function on its website that allows family and friends to contribute towards any goal – for instance a child’s education – which could be useful especially for birthdays.

INVESTMENT OPTIONS

Unit trusts

Most experts view unit trusts as the best way to save towards a child’s tuition fees. Jillian Howard, writer of The Best Pocket Guide Ever for Family Finances, says in the long term returns on unit trusts are consistently higher than returns on cash savings and usually also better than those on educational policies.

“A unit trust provides a much better chance of beating inflation over longer investment periods than a typical bank savings account. But the returns from most unit trusts aren’t guaranteed,” Locke says. Still, there are many kinds of unit trusts to choose from, with risk profiles to suit the specific investment timelines of each investor and their objectives.

A disadvantage could be that during hard times you can easily withdraw from a unit trust, thereby depleting your savings. Another disadvantage is that unit trusts aren’t tax-exempt, unless it’s part of a tax-free savings investment. A significant amount of your interest (in other words, profit) from unit trusts however is tax-exempt.

Fundisa

If you can only afford small amounts but still want to save for education, this investment tool is a good alternative, Ingram says. It’s a team effort between The Association for Savings and Investment South Africa (Asisa), the government and various financial institutions. Fundisa is basically a unit trust with a lower risk.

The minimum monthly instalment is R40, and Fundisa is in a sense subsidised in that an amount of 25% of everything you save annually is added to your investment. The “bonus” however is capped at R600 a year. Trevor Chandler, Asisa’s policy advisor, explains that the fund is intended for households earning R180 000 or less a year. But higher income earners can invest on behalf of an underprivileged child.  

Policies

If you can’t resist the temptation to use some of the money “temporarily”, consider taking out a policy. A policy’s investment period is fixed, for example at five years (usually the minimum period) to 15 years. According to Ingram education plans and policies are essentially endowments and all have a maturation date.

According to Howard the high administrative costs of this type of investment product often scares people away, but the cost sometimes includes insurance in the event of death to ensure the policy will still be paid out upon maturation. 

Property
You can buy an extra property like a townhouse or flat with the intention of using the rental income to make a profit, Swart says, or to sell it at a profit later. But aim towards something with lower levies, rates and taxes.

If you don’t like the idea of handling a tenant – and potentially dealing with late rent payments – you can invest in listed properties. These are shares in or unit trust exposure to properties like apartments, office blocks or shopping malls. Thanks to ongoing urbanisation this seems to be safe bet.

Tax-free savings accounts
These are part of a drive to encourage South Africans to save. The advantage with this type of account is that you’re your savings aren’t taxed, up to a limit: up to R33 000 a year (or R500 000 in a lifetime) saved is tax-free. Anything more than that is taxed at 40%.

It’s a good option for those who, for example, want to save as little as R500 a month for their child’s education. It’s also a flexible option, as you can save monthly or make ad hoc deposits, pause instalments and restart them at any time, and also withdraw your money.

GENERAL INVESTMENT ADVICE

Shares usually deliver long-term consistent returns above inflation. You should aim for consistent returns of no less than 6% if you want to save effectively. If you’re not a professional investor, then use a unit trust or another type of diversified investment like an exchange traded fund (ETF). These invest across many different securities by law, reducing your reliance on the performance of a single share or security.

Besides investing in shares, you can also consider other asset classes such as government bonds, property and even cash. You should only invest using regulated financial services providers. Your asset allocation is the primary driver of your performance. The biggest decisions to make is getting the asset mix right, and the fees low.

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