Investing for education – An issue for parents to consider

Children at school

Rather than paying school fees from your salary, consider investing, and then using your investment to lower the impact of education costs on your budget.

Over the last 15 years, the cost of education has been increasing by almost 10% per year, according to Statistics South Africa. For example, if today it costs R45, 000 per year to send your child to high school, this could escalate to R74, 490 by the time your child is ready to attend. Education inflation is about 4% higher than the general inflation rate.

This means that, unless your salary increases by at least 10% per year as well, as time goes by it will get increasingly harder to make space in your budget for school fees.

Allan Gray analysed the cost of financing education for a single child, from pre-school through to tertiary education. They found that if all the fees were paid from a parent’s salary, the total cost could end up being almost R2.4 million.

If, instead, the parent started investing R3, 500 per month at the birth of the child, and used the investment to fund all of the fees, the impact on that parent’s budget would be 29% lower. This is assuming an investment return of 3% above inflation.

“Although this requires contributing a meaningful percentage of your salary at a time when you have other financial pressures, tight budgeting upfront allows for predictability and cost saving in the future,” says Wanita Isaacs, product development manager at Allan Gray.

As with any investment plan, the sooner you start putting money aside, the longer your money can work for you. However, if your child has already started school, don’t be disheartened, says Isaacs, investing can still ease the burden of the more expensive later years of education.

School Teacher at Work

The growth you earn on an investment for the later schooling years also significantly lowers the impact of education costs on your budget, even if you miss the opportunity of starting your investment when your child is born. Even if you start your investment after your child starts school, and your investment only earns enough return to keep up with inflation, investing would lower the impact on your budget by 13%.

Whatever you do, avoid taking out a loan to finance education. Although the power of compound interest works in your favour when you invest, the same mechanism works against you when you borrow and makes credit the most expensive option – especially if you are making use of an unsecured personal loan.

“It’s scary to think that the cost of credit to fund later schooling can work out to almost four times more than your total education costs if you had invested for these schooling levels from birth and paid for the early schooling years from your salary,” Isaacs says.

If you decide to invest for education, there are many investment products available that may suit your needs, including various specialised education policies, endowments and unit trusts.

An independent adviser can help you to assess your current and future financial situation and recommend the most suitable course of action.

Article supplied by: Claire Densham Communications


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