Smart investing for your child’s education

Education.
Education.
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Most parents strive to provide their child with a good quality education that will give them the edge and relevant skills to cope in our fast-paced and evolving world.

However, this comes at a high price, with education inflation estimated as high as 9.5% a year.

“This means that a parent whose child starts grade R in 2019 can expect to pay between R1m and R3m for public or private education including three years’ tertiary education,” says Mduduzi Luthuli, investment manager at Luthuli Capital.

These figures are daunting and don’t even include extra costs like stationery, transport and extramural activities. What’s worrying is that at least half of South African parents are not saving for their children’s education, but expect them to support them in old age, according to Old Mutual’s 2018 Saving and Investment Monitor.

“The best strategy is to keep it simple. The cheapest way to pay for an education, or anything for that matter, is to invest for it,” says Grant Locke, head at Outvest, which offers an easy-to-use, app-based investment.

Locke says you should ideally start saving for your child’s education from birth and pay for all fees from the investment or invest for later education and pay for their earlier years from your salary.

However, even if you do start late or are only able to save a small amount each month, you’ll still be better off than not saving at all.

Investment options include:

Tax-free investments

These save you tax on interest, dividends and capital gains. You can make contributions in your child’s name but annual and overall contribution limits apply, so it might be better to save in your own name. You can’t contribute more than R33000 a year or R500000 over each investor’s life, and amounts withdrawn don’t reduce these limits.

Unit trust fund investments

They start as low as R100 with a professional fund manager selecting securities across markets or asset classes. You can stop and restart contributions without incurring penalties. This product is transparent, well-regulated and generally low cost.

Exchange-traded funds

These passive investments replicate a share index. They are generally cheaper than actively managed but not necessarily cheaper than passively managed unit trust funds. You can invest in them directly and pay dividends tax or interest through a tax-free savings account. You can invest from R300 a month.

Education endowment policies

Offered by most financial services companies, with a monthly contribution payable for a minimum of five years, these policies may seem like a good idea. However, if you cannot save for the full term – for example, if you lose your job – you could end up paying penalties. In addition, the growth on endowment policies is taxed at a standard rate of 30%, meaning you could end up paying more tax than you need to if you’re in a lower tax bracket.

“Endowment policies are usually expensive with fees at the higher end of the 3% to 5% range, which means you need to earn significant returns just to beat inflation,” independent financial adviser Ricky Rohrbeck says.

Crowdfunding is another way to save for education

According to Locke you can involve family and friends by using features like Outvest’s Crowdvest. It allows family and friends to contribute towards your child’s education fund instead of buying them toys and other gifts.

Luthuli warns that you should match your investment’s term to the number of years before you need the money.

However, you may also need some flexibility in your plans, in case you need the money a little earlier or later.

And don’t confuse a life policy for an investment.1

“Just because a policy acquires a surrender value over time does not mean it is a savings plan – and most certainly not a savings plan for the purpose of your child’s education,” says Luthuli.

You can also make this a learning opportunity for your child, instilling lessons such as the value of money and the importance of saving.

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