Early start best for education

THREE ESSENTIALS: COSTS, INVESTMENTS, PENALTIES

Jesse Morgans, a wealth management consultant at Asset Protection International, advises a reader on how to invest for his kids’ education.

Question: What is the best investment strategy to save for our children’s future education expenses (nursery to high school) from birth and, if you’re starting to invest late, for those already in school?

Answer: Institutions such as Old Mutual, Momentum, Sanlam and Discovery have offered education-funding solutions, with products ranging from flexible investments to tax-free savings.

Three factors must be considered here:

What are the costs associated with the product?

What are the underlying investments that can be accessed?

Are there any penalties? The option of choice would be a simple, tax-free savings account that allows you to save R33 000 a year.

One of the concerns for investors who are saving for their retirement is being able to make a decent return over and above inflation, with education inflation of 7% exceeding core inflation of 6.1%.

On average, an education fund must get a return of 9% compounded per annum to keep up with education inflation. This is consistent with a multi-asset high-equity fund, if not that of a full equity fund, depending on the client’s risk profile and time frame.

Old Mutual estimates university fees will triple in 15 years, maybe just as your kids leave school.

If your child was born in 2016 you should contribute a monthly amount of R1 000 to R1 500 escalated at 9% per annum, with the aim being to fully fund your child’s tertiary education. R1 000 per month escalated at 9% pa over 18 years, with an estimated annual return of CPI (6%) + 7 compounded annually, gives an estimated capital amount of R832 419.

This capital amount should be able to fund three years of university (a bachelor’s degree) at an estimated cost of R237 000 per year.

If you have been unable to start an educational fund early on in your child’s life, your savings strategy should not deviate from that of the above. The variable that will have to change is the amount that you contribute each month to make up for the time lost.

It’s a good idea to include a parental life cover policy just in case.

It’s hard to generalise and advise when it comes to investing for a specific purpose over a long period. This article gives readers an indication only of what it will take as long as you prepare long in advance.

Perhaps the best advice is to utilise the services of a financial advisor to create a realistic, tailor-made educational plan.

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