One of the biggest investments a parent will make will be in the cost of their children’s education. Schooling is already expensive and if you’re considering tertiary education outside of the country, the costs will be astronomical. Are you prepared?
- The rate at which education costs are outpacing inflation and both are outpacing increases in average salaries, means that educating your children is becoming prohibitively expensive.
- Very few people will be able to afford private school education for their children, let alone tertiary education.
- Old Mutual’s 2017 Long-term Perspective Report projects that by 2026, at a 9.2% education inflation rate, a year’s tuition and board at a top private school will cost R482 000 and a year’s fees at the same school are expected to be R1 053 000, 21 years from now.
- As much as 55% of South Africans are not putting anything aside for their children’s education, according to Old Mutual’s Savings and Investments Monitor (OMSIM).
- 58% of households across SA are facing high financial stress as their savings decrease and debt increases due to the Covid-19 crisis, according to OMSIM, with as many as 57% of those surveyed earning less than they were at the end of February 2020.
- The Old Mutual Sandwich Generation Indicator shows an increase of 8% between 2019 and 2020 in those supporting their own children as well as helping to care for elderly parents or relatives.
These are the grim realities. The current strain on financial wellbeing and the pressure on household budgets makes it even more important to make informed financial decisions. “At Carrick, we always advise our clients to take a long-term view which should most compellingly also apply to the education of one’s children,” says Anthony Palmer, Carrick Group Commercial Director. Here’s what to do:
- Save now
Parents have to accept the need to start saving early for their children’s education, factoring in not only tuition fees, but other costs such as sports equipment, tours and extramural activities.
“Develop a savings culture,” advises Mike Fannin, Senior Wealth Specialist at Carrick. “Start with taking some of the money you currently spend on luxuries and put it aside towards your savings plan.” As an exercise, look at your little ‘splurges’ from a different perspective: If you spend R150 a week on takeaway coffee, that’s about R7 800 a year on your on-the-go caffeine fix. Add an interest rate on that which compounds each year and it becomes a frightening number over time.
“Most people think it’s such a big hill to climb that they just don’t start,” says Fannin. But the money is there, he says, offering this example: You currently order a meal in one night a week at R250. If you give up that takeaway twice a month, you will save R500 a month. At a 10% return, over 18 years you can save R350 000. Take away your twice weekly cappuccino and that’s another R200 saved. Car-pool and save a quarter tank of petrol and suddenly you’re saving R1 000 a month. That’s a million over an 18–year period.
“If you start to look for ways to save in every way every day, you will see how much money you waste. The second you start, it becomes easier. We spend our lives paying people but we never pay ourselves. If you pay 10% of your salary to yourself and keep it to grow your wealth, you can solve most of your problems quite quickly.”
- Have clear goals and research your options
You may think that saving 10% of your salary is a lot, but when you’ re in the moment of buying something you don’t really need, think about telling your child that you are not able to send them to high school or college. It’s essential to have clear goals and work towards them. If you’re considering an education policy, compare costs, restrictions, expected returns and other product features and benefits. Each product will have its pros and cons. Seek sound financial advice to tailor your plans according to your needs and ability.
- Invest offshore
If you’re considering sending your child overseas to study further, you need to plan well in advance. Find out about the fees now and take inflation into account. As you will need foreign currency to pay for tuition, it makes sense to align your assets with future liabilities, and therefore to invest offshore. You can either transfer money into an offshore bank account (the South African Reserve Bank allows individuals to send up to R10 million offshore every year, provided you obtain a tax clearance certificate from SARS), or invest in rand-denominated foreign funds, which allow you to invest indirectly into offshore assets without having to convert your Rands into a foreign currency.
“It’s often the small adjustments you make along the way that can mean the difference between having enough or falling short when the time comes to pay for education. There’s a lot to get ready for and the best time to start is now,” concludes Fannin.