Start saving - even a little to take bite out of rising education costs
Turn the table on the power of compound interest
Janu-worry is a bad month for most people after excess spending in the December holidays, but it's worse for parents of children at school or in tertiary education.
Janu-worry is a bad month for most people after excess spending in the December holidays.
But it is a particularly bad month for parents of children at school or in tertiary education, as there are school books and uniforms to buy – and sometimes gadgets like calculators and laptops.
And it’s the month that school fees go up, typically well in excess of any salary increase you may receive.
Education inflation, the rate at which the cost of education increases each year as measured by Statistics SA, has averaged 10% over the past 15 years – that’s four percentage points higher than general inflation, says Saleem Sonday, head of group savings at Allan Gray.
That means if inflation is 3.6% as it was for the year to November, your salary will probably go up by 3.6%, but school, college and university fees will go up by 7.6%, taking a larger share of your household budget.
Not budgeting or planning adequately for the rising cost of education, and not accounting for education inflation, may put a lot of pressure on your monthly budget, Sonday says.
Most parents know that they have to save for their children’s tertiary education unless your family qualifies for free tertiary education or your child will qualify for a bursary or scholarship. But given the way that school fees escalate it also makes sense to have a savings fund to soften the increases.
Marius Pretorius, proposition manager at Old Mutual, says smart parents know that a good education remains the surest way to safeguard your child’s future.
The reality is that 55% of South African parents in urban areas are not saving at all for their children’s education, according to the latest Old Mutual Savings and Investment Monitor.
While it may be painful to find an additional R400 a month now to save for your child’s education, when they reach high school or university, you will be in a much better financial position to cover some of their costs, he says.
Use your talents as, for example a baker, crafter, Zumba instructor, DJ, photographer or writer to earn extra money to save for your child’s education.Marius Pretorius, proposition manager at Old Mutual
You could start this year just trying to save up for next year’s books, uniforms and other additional costs such as outings and extramurals – or just one or two of these additional expenses.
Kenosi Magosha, head of client solutions savings at Sanlam, says stationery for a grade 1 pupil averages between R700 and R1,000 and a school uniform including a blazer can easily set you back around R2,000.
School outings usually add at least R600 or more to the year’s expenses, while extracurriculars can add up to anything from R1,500 a year upwards for participation and the equipment, Magosha says.
“These unexpected costs can quickly accumulate and ‘trip’ parents up,” she says.
Without a plan for these expenses you may be tempted to fill the gap by buying on credit. Some parents have even resorted to credit to pay school fees. You don’t want to spend the rest of the year paying off these expenses on your credit card, Kerry Sutherland, a senior wealth manager, at Alexander Forbes, says.
While the higher inflation on education fees is already a hurdle for your budget, the high cost of credit will certainly take you backwards.
Sonday says when you save and invest the power of compound interest works in your favour, but the same mechanism works against you when you borrow. So, as hard as it is, you need to turn the tables on interest.
Aim to provide in advance for a manageable portion of your education costs by choosing an expense in your budget you can trim back and save the money you free up. Your savings will grow – admittedly only a little while you have a little saved – but saving even a little will give you some relief, at the very least from incurring more debt.
If your child, or one of them, is just starting his or her schooling, you could start to save small amounts over the long term in, for example, a tax-free savings account that invests in a multi-asset unit trust fund. Aim to save enough to pay for their annual high school fees upfront from, for example, grade 8. That way you can take advantage of the discount most schools offer parents to pay their fees upfront.
In its free email ‘Saving for Education’ series, Allan Gray cites the example of a Johannesburg mom Khensani Maluleke who saves R1,700 every month in a tax-free savings account and earns around 5.7% on her money in a bank account.
She then uses the money to pay her daughter’s school fees of more than R21,000 upfront. The school offers her a month free for paying the whole amount at the beginning of the year, which saves Maluleke more than 10% on her monthly budget.
She also tops up her contributions with a lump sum from her annual bonus paid in March.
Maluleke says this also gives her peace of mind that should she lose her job, her daughter’s school fees will still be paid.
Education costs can seem overwhelming, but Pretorius says proper planning, which includes drawing up a budget and the discipline to stick to a plan – possibly with the help of a financial adviser – will ensure you are able to give your child the valuable gift of a good education.
He suggests you use your talents as, for example a baker, crafter, Zumba instructor, DJ, photographer or writer to earn extra money to save for your child’s education.
Pretorius says you could also consider giving your children less expensive gifts and using the savings to top up their education savings or unit trusts.
Understand that the more you save, the more freedom you have to choose from a wider variety of school options or to lessen the burden on your budget, Sonday says.