Saving for your kids’ education
policies to investment options, here’s the lowdown on the best ways to ensure your kids reach their potential
RAISING kids is expensive. But it’s possible to have a financially stable family life despite the huge costs involved, financial planner Jillian Howard says. It all comes down to planning and preparation. In this extract from her book on family finances, she explains how parents can afford their child’s education.
‘IT’S easy for an individual to control his or her finances. You’re accountable only to yourself for your spending habits and you make your own decisions, whether right or wrong.
Once you find a partner, however, you might find that your financial opinions differ, making planning much more complicated. And once you add children into the mix and you’re faced with the expenses they generate, financial pressure increases even further.
But if you prepare for it, learn to adjust and follow a good plan you’ll be able to enjoy a financially stable family life.
Statistically, couples who don’t have children are financially better off than those who do have kids. This doesn’t have to be the case but proper financial planning must be done for a family to thrive.
Without a plan, parents tend to spend their entire combined salary surplus on the children’s needs to the detriment of other financial needs, such as wealth creation (which benefits everyone, including the children) and retirement funding.
Another trend is to minimise life cover in order to save in the short term, which puts the family at risk financially should anything unexpected happen.
One of the key factors of proper financial planning is to consciously maximise your salary surplus by keeping debt and lifestyle expenses low and to use this surplus to grow your wealth. This often flies out of the window when children come along as the surplus is used for the children.
After the initial expenses of having a baby, most parents start to think about educating their child in the best way possible. This usually means in the most expensive way possible.
If your monthly salary surplus is huge, the breadwinners are protected from loss of income (insurance, contingency investments) and you can easily afford school fees and extramural activities every month without compromising your investment and retirement goals, then you have a financially ideal environment in which to provide for your children.
But if not, what do you do? Most parents opt to start an investment for their children’s future educational needs. Here’s an overview of the investment options available. AN EDUCATION POLICY These are sold by various insurance houses and are basically savings plans that pay out in stages – for example when a child turns 18.
Insurance companies provide the option of guaranteed funds (either a guaranteed payout or a capital guarantee on the investment) as well as life and disability cover on the payer of the premiums. No other investment offers this.
It’s a nifty package, since even if a parent dies, the premiums still get paid (or a lump sum is added to the product deFrom
pending on the option taken). The investment portion (the amount minus the cost of insurance) can also be guaranteed, so if markets fall just before payout, the policy proceeds won’t suddenly fall.
The main reason people aren’t so keen on this policy is because of the high charges involved: the investor typically pays a fair amount of the monthly contribution towards the insurance portion, which reduces the actual investment amount.
You’ll probably wonder why you should insure your investment when you have more than enough life cover to pay for your family’s lifestyle and your children’s education. But most people don’t have enough life cover, and this cover provides certainty that your child’s education fund is secure.
This type of policy will be beneficial if you get divorced as it ensures that if the payer of the policy is the parent who pays maintenance and they’ve taken the life insurance option, then on that parent’s death the child’s education will be provided for.
Often a maintenance-paying parent worries the ex-spouse will use any lumpsum insurance payout for his or her own needs instead of the children. With an education policy, however, the funds are earmarked for education only.
A pitfall of this particular policy is that the amount paid out might not be enough to cover all education expenses. But this applies to all investments: if you don’t save enough every month, the payout won’t be high enough. That’s why you should monitor your investment returns every year. A SAVINGS ACCOUNT A bank account is another traditional savings vehicle and your best options are a saving account with a bit of extra interest for children or a money market account.
As a long-term investment, cash doesn’t offer a good enough return. This is true especially when the savings amount is large enough to attract tax. In fact, after inflation the investment could even give you a negative return (a scenario in which inflation grows more than interest earned on an amount after tax).
It’s a safer investment than a unit trust but you pay for safety. You usually don’t have to pay any charges but the downside of this investment is it lacks a decent return. UNIT TRUST INVESTMENTS This has become a preferred investment choice for parents saving for their child’s study fees. Returns on unit trusts are better in the long term than returns on cash savings.
And because they’re cheaper to buy they usually provide a better return on investment than an education policy. You have flexibility and liquidity, which is a good thing if you need to access the money before university ( for an overseas sport tour, for example). But you’ll have to be disciplined about not accessing the money too often. Also, the value of unit trusts is marketrelated so there’s a risk that right when you need the funds the market has a downturn and your investment takes a knock. You can’t insure unit trusts or set any kind of guarantee on the returns or capital invested. OTHER OPTIONS It’s possible to create a nice nest egg to pay for university fees with a share portfolio. But this type of investment isn’t for everyone – you have to know what you’re doing even if you’re using a stockbroker.
You can also choose a hybrid of unit trusts and a share portfolio by investing in an index. This is a long-term investment and entails buying units monthly, as you would when investing in unit trusts, but you buy into a share portfolio that mimics certain indexes – for example, the 40 largest companies on the Johannesburg Stock Exchange.
The fund is automatically traded to follow the trend, so you’re always investing with the top 40 companies even though companies might come and go. Because it uses an automated system it’s low on cost but once again as it’s market-related its value could fall at any time.
So you need to know when the general market (or a segment of it if you’re investing in another index such as the financial company index) is overpriced and likely to devalue – especially if you’re nearing the time when you’ll need the funds. It’s a great investment but a little complicated and therefore not for everyone.
If you like the sound of share portfolios and indexes, study how they work so you fully understand the risks – and how to combat them – before you invest.