To PROTECT and to PROVIDE for our children – these are probably the two strongest attributes parenthood brings out in people. Protecting and providing for your children happens in so many ways and is so self-explanatory that we don’t need to bore you with examples, except when it comes to EDUCATION.
A good education will help protect your child from many societal ravages, especially in later life when they are no longer under your guidance. A good education will also provide better opportunities for your children in the future.
How do we best provide for our children’s education?
Let’s tabulate 3 schooling scenarios
- Low scenario – decent entry, lower-cost government schooling;
- Medium scenario – higher-end government schools or entry level private schools; and
- Higher scenario – mainstream private schools.
We note that no assumptions were made on elite private schools or overseas university education.
Figure 1: Various scenarios for education saving:
|3 months – age 6
|Age 7 – age 13
|Age 14 – age 18
|Age 19 – age 22
|Inflation-adjusted total cost
Figure 1 above assumes that all fees increase by 6% p.a.
The first step is PROTECT and/ or INSURE a parent’s ability to pay for their child’s education. This means some type of life assurance, that will ensure schools fees are either paid for, or that there is a capital lump sum set aside to be invested and used to pay the required fees. Generally, this type of insurance would provide cover if the parent(s) died or become disabled. There are a number of risk-insurance products in the market that will provide, in lieu of parents being unable.
A simple calculation of how much is needed would be to discount the total fee by the inflation rate, so in the medium scenario an amount of c. R800,000 life cover should be enough to cover expected costs. We highlight that this cover would need to be recalculated and reset every year as the potential obligation decreases with the passage of time.
The second step is how do you save or pay these fees along the way?
- Pay what you can afford as you go: Most young couples experience this method. They try and pay for the best education with the money they earn as a salary. Young parents often have high debt levels, particularly with bond and car repayments to deal with. They have to manage their cash flows and school fees on a monthly basis. The risk here is that these parents may overcommit and have some financial difficulty (such as being retrenched) along the way which can be problematic. The simple solution is to at least ensure the family has an emergency fund in place to cover unforeseen eventualities. Three months of expenses saved would be a significant buffer and a money market account would be a great savings tool. Parents doing this can always look to add savings using Option C below at some future point in time.
- Save and pay: This option requires a bit of planning and high discipline levels. The idea is that parents are saving a bit extra and pay fees as they go along. For example, in the medium scenario above, creche costs start at R3,000/month. However, if parents set aside an additional R2,000/month in savings, this amounts to a total of R5,000/month. If you increase that savings rate by 6% p.a. then, when a child is around the age of 10-11, the cost of the monthly savings becomes less than the school fees and, ultimately, you knock off at least 2 years of costs at the end. The total cost for the medium scenario would be c. R2,917,333 and you would only have had to save around R2.4mn. If you have spare income to start off, then this is definitely a great option as you are building in safety mechanisms right from the start. Because this system involves adding and withdrawing savings along the way a moderate/ balanced unit trust fund would be the most suitable.
- Save for university and beyond: The idea here is to save for university and any possible expenses beyond that date (car, home deposit, weddings, gap years, etc.). In the medium-income scenario of R80,000 p.a., tertiary education in today’s terms means the cost in 18 years’ time will be c. R228,000 p.a. By starting to put away as little as R1,000/month and increasing this at a rate of 6% p.a. it is likely to remove the tertiary education problem. If you keep up those savings along the way, then providing your child with a few further helping steps ensures that they start their working careers on a stable footing and not overly indebted.
The recommended savings vehicle that we consider the most appropriate for education saving, due to its complete flexibility would be unit trusts. With unit trusts you can add money anytime, you can withdraw at will with no penalties, you increase/ decrease debit orders, you can set-up regular withdrawal amounts and there is a wide range of unit trusts available from which to choose.
The US is currently experiencing a student loan debt bubble. Too many students have taken on too much debt to get themselves educated, because their parents did not plan appropriately. Servicing that debt when you start to work is proving too big a burden to carry for many.
Education is critical for your child and the scenario planning we discussed above is fairly straightforward, making it the best way of protecting and providing for your child’s education and future.