Saving for your child’s future

Depending on where you send your child to school, the combined cost of education (all the way to university level) can be more than R2 million. Angelique Ruzicka explores the various savings options out there that parents can consider that will help them save for their child’s educational needs.

As thousands of children head back to school this week you may be wondering how you can continue to afford paying for your child’s tuition fees, uniforms and other day to day needs. With education inflation surpassing general inflation every year will get tougher. One way to tackle this problem is to start saving today.

While this may seem an obvious way to combat the rising costs of school fees not all parents are doing it. According to the Old Mutual Savings and Investment Monitor, only 40% of South African parents are saving for their child’s education. “This is alarming when you consider that a good education can end up costing hundreds of thousands of rands,” says Sinenhlanhla Nzama, investments actuary at Old Mutual. “Our stats showed that people are tightening their belts and education is one of the main areas where budgets are cut.”

Counting the costs

Figures provided by Old Mutual show that in 2014, one year’s education could cost between R23, 000 and R42, 000, depending on the level (primary school, high school, and university) and type (private or public) of education.

If your child is starting grade R this year, the combined cost of education is expected to be R950, 800 for public schools and R2,207000 for private.

Keep calm and save

While these figures are alarming for any parent it’s important not to panic and implement a savings plan instead. “Whether you are new parents, a single parent or an established family, the key is to start saving early,” says Nzama. “Life can be very demanding so parents have to be aware of the future cost of quality high school and university education. The later you start saving, the more you will need to save per month.”

For example, looking at the figures in the table and assuming a 10% investment growth before fees, you need to save about R460 a month for university tuition (excluding accommodation, books and travelling costs) if your child is born in 2014. However, this is about R870 (close to double) if your child is already 10 years old! These monthly savings will also need to be increased by 9% a year going forward, to keep up with education inflation.

Eunice Sibiya head of consumer education at FNB says that creating a budget will help in executing a savings plan. “You need to add this [educational costs] expense to your budget as soon as you possibly can, so that you can add a meaningful contribution toward your child’s education. It might be tough in the beginning to stretch your budget, but this will allow for adequate savings in the future.”

Savings options

There are a wide variety of savings options out there. “Depending on the child’s age, consider opening a savings account, or approach your bank or financial institution to ask about savings or investment plans specifically geared towards saving for an education. Many people do this for university tuition, but these savings plans can be for any level of your child’s education,” says Sibiya.

Unit trusts are also a favourite among people saving for their children’s education. “Unit trust investments are ideal for people who require flexibility and access to the funds, however you must be disciplined and avoid the temptation of dipping into your child’s funds,” adds Nzama.

If you think you may be tempted to dip into these funds you could consider savings policies which are fixed for a certain period of time (say five to 15 years). You can either pay fixed monthly premiums or make a lump sum payment into the policy. There’s limited access to the money and you will have your savings invested in a wide range of unit trusts of your choice. There’s also the option of investing in life funds that offer minimum guarantees.

The government backed savings initiative, Fundisa, is also an option for households earning R180,000 or less a year. There is an annual fee of 1.25% (excl. VAT) that is taken from the income earned in the Fundisa Fund. If you take on the advice of a financial advisor to advise you on the Fundisa they may charge you no more than 3% of your investment. The Fundisa fund is available through a number of financial institutions including Absa, Standard Bank, Old Mutual and Nedgroup Investments to name but a few.

If you invest in a Fundisa fund you’re paid an annual bonus on the investment, which can be up to 25% of the money you save annually up to a maximum of R600 per child. If you save R100 a month (R1 200 a year), you will get another R300 a year. To receive the maximum bonus of R600, you have to save R2 400 a year. The bonus can be only be used by the learner. You can withdraw your own money but will then lose the bonus.

It’s never to late to start saving, but the earlier the better. “Start early, even if it’s a small amount each month – it will always go along way to the future after some investment growth,” concludes Nzama. “Speak to your financial adviser who will help you choose the appropriate product and give you advice on how much you should save. This will put you on the right track to securing a good education for your children.”