Although a property purchase is commonly dubbed one of the most significant investments a person will ever make, so too is the investment in a child’s education. A good education unlocks the door to myriad possibilities and is not something that should be skimped on if you want to give your child the best possible chance of being successful in life.
However, this investment does not come cheap, nor does it happen by chance. At present, university fees range between R20 000 and R60 000 per year for a three or four year degree. This figure excludes books or any of the many extras students typically require. For degrees like medicine or engineering, the fees are considerably higher, and if the student has to stay in residence or other accommodation, this amount can double.
Fast-track this scenario and consider what the parents of a child born in 2013 can expect to pay for university in 18 years time. If tertiary education fees increase at the current rate of inflation (around 6 percent per annum) parents may have to set aside at least R171 000 per year for university fees in 2032.
“Saving for a child’s tertiary education requires total commitment and long-term discipline. The earlier you start to save, the better your chances of being able to give your children the education they deserve,” says Sugendhree Reddy, head of personal markets at Standard Bank.
The first step to start saving for your child’s education is a commitment to stick to a plan until your child completes his or her education. Avoiding the temptation of dipping into savings when running short plays a key role in this regard.
“Many people find themselves ‘borrowing’ from the education fund for something else that may require funding now – a deposit on a new car, a family emergency, a new washing machine,” Reddy says.
She adds that no matter how good your intentions are, replacing or making up the ‘borrowed’ money is difficult because not only do you have to pay in the amount taken, but also the interest that will have been lost. The result is that your child’s education fund may well fall short of its target.
The solution to this conundrum lies in selecting a savings vehicle that either doesn’t allow you access to your money, or makes withdrawing money difficult. There are many savings options available on the market. Ultimately it is up to you to choose a product that best suits your needs in terms of flexibility, accessibility, costs and returns says Reddy.
Because of the accessibility, convenience and ease of use and understanding of banks’ saving products, it is easy to save with a bank adds Reddy. Furthermore, banks provide security for your saved funds: what you put in is what you will get out, as well as whatever interest you have earned.
If you are extremely disciplined, you could simply put the money into a basic bank savings account. These savings accounts range from entry level flexible accounts to notice deposit type accounts (for example, a 32-day account), to contractual savings accounts which require set payment amounts every month for an agreed period.
“Because of the wonders of compound interest the longer you save, the more interest you will earn as you start to earn ‘interest on interest’. With regular contributions, you will be amazed to see how your savings grow over time.”
However, Reddy points out that because of inflation, the amount you put towards saving today will be worth less tomorrow. As such, she recommends that monthly savings contributions be increased by at least the inflation rate every year.
The following table provides an indication of how much you could save based on a 3.5% interest rate with an annual increase in your monthly savings contribution.
Other savings options include endowment, educational policies, or unit trusts. Unit trusts are essentially group investments by expert stockbrokers who invest in top-performing Johannesburg Stock Exchange shares on their clients’ behalf. While they can perform really well, they can also lose value if the stock market underperforms. Unit trust fees can also be relatively high.
Endowment-type products also have the potential to deliver higher returns than a bank savings account, but they also come with higher fees and greater risk. For example, if the product is equity based and no guarantees are offered, you risk losing some of your savings if markets do not work in your favour.
However, there are advantages to these specialised investment vehicles that are worth considering. These types of investments:
• Ensure that your monthly payments keep up with inflation and increases in the costs of education.
• Generally give you a higher return on your savings because you’re investing over a longer period of time; and
• Make it difficult for you to dip into the funds when you have a sudden shortage of cash for day to day living. Endowment policies, for instance, allow you to make only one withdrawal before the policy reaches maturity.
“The important thing to remember when saving is that you are saving for a specific goal. Education is important and you cannot afford to be caught without funds. That alone should be motivation enough to ensure you do start saving.”