Thandi Ngwane, Head of Strategic Markets, Allan Gray Affording the cost of education can be difficult when you have other financial pressures, but tight budgeting at the outset allows for predictability and cost saving in the future.
Alternatives to paying fees from your salary
When you invest, the returns you earn lessen the total financial impact of school fees on your budget. We recently analysed the cost of financing education for a single child, using estimates for a suburban Model C school and tertiary education at a major university. We found that if you paid all school and tertiary fees from your salary, the total cost could end up being almost R2.4 million! If, instead, you start investing at the birth of your baby, you can reduce the impact significantly. Although contributing a meaningful percentage of your salary may be tough when you have other expenses, it will really pay off over the long term.
However, if you have missed the opportunity of starting to save at the birth of your baby, don’t be disheartened. You can start saving now for the later, more expensive years of school, thus lessening the future financial burden.
What are your investment options?
If you decide to invest for education, there are many investment products available that may suit your needs, including various specialised education policies as well as unit trusts and endowments. Unit trusts are a flexible form of investment - you can either invest a lump sum or make regular monthly investments. Your money is always accessible because you can cash in your investment or a portion of it, when you need to. You can also transfer your units to another person or invest on someone else’s behalf.
A unit trust is a good tool for educational savings purposes, but it is important to take a long-term view. If your underlying investments are in assets such as shares and bonds, it is important to remember that markets may go down as well as up, and you may lose money if you lack staying power.
An endowment policy is another potential option. Many endowments also have unit trusts as their underlying investments, but have a minimum investment term, usually starting at five years. During this time you are only allowed one withdrawal. While this means less access to your money, it also means you can be sure that your savings are kept for your child’s education. Endowments also allow you to create liquidity in your estate as your beneficiaries may be paid out straight away when you die. Endowments are more suitable for higher income earners as they are currently taxed at a flat rate of 30%.
Remember that in deciding which product best suits your needs, you should consider factors such as when you will need access to your investment, how your investment will be taxed and what happens to your investment in the event of your death. It is important to research the various options available comparing costs, any restrictions, expected returns and other product features and benefits. An independent financial adviser can help you to assess your current and future financial situation and recommend the most suitable course of action. You can learn more about investing at www.allangray.co.za/investingexplained/ Do you have any investment-related topics? Send an email to email@example.com and we’ll do our best to deal with popular themes in this column.
Allan Gray Proprietary Limited is an authorised financial services provider.