Helping your children by investing for them could be seen as a luxury, but with the cost of education soaring, it’s looking more and more like a necessity. A 2016 report from City Press indicated that education for a child starting Grade R in 2016 and matriculating in 2028 would cost approximately R253 000 at average fee-paying schools, R676 000 at upper-income former Model C schools, and R3.7 million at private schools. And that’s just the bill before tertiary education.
Depending on the education choices you make for your children, it’s likely you might feel some financial stress once your children start school.
Remember that any saving or investment should align with short-, medium- and long-term goals. And know that these goals change over time. Paying for a child’s secondary or tertiary education would be a long-term goal when they’re a baby, says the US Financial Industry Regulatory Authority, but a short-term one when they’re in the final year of high school.
The various savings options available to parents include the following:
Unit trusts, either bought directly from the asset manager or through a Linked Investment Service Provider (LISP), offer a simple and generally cost-efficient way to get exposure to equities. If you have a long-term education saving goal, you would necessarily want to look at asset classes that have the best chance of outperforming inflation over the long term (given the fact that education inflation is much higher than consumer price inflation, it’s no use keeping your savings in cash because you will underperform against inflation over time). Equities have historically proven to be the best option for beating inflation.
Tax-free savings accounts
A tax-free savings account can be opened in the name of a child, who will have their own R30 000 annual limit. The lifetime contribution limit of R500 000 can be ignored because this will only become an issue by the time they’re 16 (if you started contributing when they were born). By then, it is likely that this limit will have been increased. And with the power of compound interest, a relatively modest investment should more than cover the cost of your child’s education.
Education saving plans
Education plans on offer by most financial services companies and insurers are typically endowment policies. With endowment policies, a monthly contribution is made for a specified period and a lump–sum amount is paid out at the end of the period. The minimum investment term is generally five years. For higher-income earners, endowments potentially offer greater tax efficiency because they are taxed at a flat rate of 30%.
Life cover is also important because you’d want whatever investments you’ve made for your children to be continued. Something like Discovery Life’s Global Education Protector will cover the cost of education (including tertiary studies globally) in the case of disability, severe illness or death.
Fundisa, an education savings initiative by the government, the National Student Financial Aid Scheme and the Association for Savings and Investment South Africa, has the advantage of a top-up bonus annually as a reward. This can be as much as 25% of the amount saved per year, up to a maximum of R600 per child. The minimum contribution is R40 per month, and there is no maximum.
However, only the first R2 400 saved per year will qualify for that top-up bonus. Fundisa is designed for lower-income earners, and only learners whose families earn below R180 000 per year will qualify. This only applies to the learner (and their family), which makes it a compelling way to contribute to education savings for a child of a nanny or similar employee.
Any option that has the goal of providing for a child’s education is important because savings are ring-fenced for a specific purpose.
Make sure your children are part of the process of saving for their education (especially as they become older and more mathematically and economically literate). This is an invaluable teaching tool and is a real opportunity to instill lessons such as the value of money and the importance of saving.
For more information on investing for retirement, speak to your financial adviser.