Finance – Save for fees now

EDUCATION at every level is EXPENSIVE and varsity fees will only continue to RISE. Don’t waste time – start PLANNING right away.

How can you make sure you can afford to see your children through primary and secondary school – and beyond? If you save for it, where should you put your money – An education policy? If the question is whether to save for your child’s education, the answer is that’s a good idea – but start early. “Education inflation outstrips most salary increases, so school fees will take a bigger chunk of your salary,” says Jéan Minnaar, head of retail savings solutions at Old Mutual emerging markets. The financial institution crunched a few numbers to give you an idea. You’ll pay R29 000 to R114 000, depending on the stage (primary school, high school, university) and type (private or public) for your child’s education this year. And if you jump five years ahead, to 2022, you’ll be looking at R45000 to R176000 for the year. They worked out that if your child is starting Grade R at a public school this year, you’ll end up spending R1057000 by the time she has completed a three-year degree at varsity. If you go the private school route, make that R2 406 000.

“The later you start saving, the more you’ll need to save per month,” says Minnaar. “If your child was born in 2016, working on 10% growth before fees, you need to save about R530 a month for university tuition. This excludes accommodation, books and travelling costs. But if your kid is 10, you’ll need to save R1050. And this doesn’t take education inflation into account. It’s very important to invest in growth assets to make sure returns are above education inflation.” An ordinary savings account is unlikely to do this.

THINGS TO CONSIDER

There are many investment vehicles and policies for saving for your child’s education. So it can be confusing. 27four Investment Managers’ Fatima Vawda gives these pointers:

1. Set your goal: Identify how much you need to be saving. Are you saving for schooling, or just tertiary education? And how much will it roughly cost at that time?

2. Know your time horizon: The biggest savings hurdle is keeping pace with the cost of living – inflation. Prices increase yearly, and education inflation typically increases at a faster rate than the rest of the economy. But the good news is that the longer you are invested, the harder your money can work for you. Keep checking that you’re on track by keeping an eye on education costs, especially when you see where your child is heading career-wise.

3. Choose the right savings plan: When looking for a policy, you don’t necessarily need a product specifically designed for education.

Risk: Equities is the only asset class likely to beat inflation over the long term, but it’s also the most

“IF YOUR CHILD WAS BORN LAST YEAR, WORKING ON 10% GROWTH BEFORE FEES, YOU NEED TO SAVE ABOUT R530 A MONTH FOR UNIVERSITY TUITION.”

volatile, so you need to consider how long you have to invest. The longer you have, the more volatility you can endure. An all-equity portfolio has the highest chance of getting you to your target, but only over a long time horizon (over 10 years).

Costs: Returns can be eroded by the cost of the product, so make sure that everything is clearly set out and that there are no hidden costs. But cheaper isn’t necessarily better, performance is what’s important.

Taxes: Tax-free savings eliminate tax leakage so all your money is invested and allowed to grow. Compounding [when you reinvest returns so you earn returns on that amount too] is the best wealth creator – so don’t be tempted to withdraw money early in the hope of catching up again later.

USE MONEY WISELY

There are four discretionary savings products you can use to save effectively for education, says Danelle van Heerde, head of advice processes at Sanlam. “There are education policies, linked investments, unit trusts, and the new TaxFree Savings Accounts (TFSA), which is the best.”

Van Heerde adds that you can invest up to R30 000 a year without paying tax on the returns. Tax relief means the effect of compound interest increases. She gives these cautionary tips. For one, don’t invest for short periods. “Though you’re able to access these funds at any time without penalties, avoid doing that! To benefit from the tax relief of a TFSA, your investment needs enough time to earn returns. Also, if you invest for a short period or start drawing regular income from the account – perhaps to fund primary school fees – you won’t get the maximum tax benefit.”

She also warns that you must not invest more than the annual limit in a tax year. “If you do, your extra contributions will incur a tax penalty of 40%.”

And what if you’re already using the R30 000 tax-free savings benefit? “Then investing directly in a unit trust fund or linked investment, which allows you to invest in a portfolio of unit trusts funds, is probably best,” she says. “In these products, interest earned and capital gains are included on your personal submission for income tax. They’re taxed using your own marginal tax rate, which means you can use your interest and capital gains exemptions.”

So, is it worth buying a specific education policy or should you pay as you go?

“An education policy is an endowment policy with life insurance built into it. It could include disability insurance, and a waiver so that if you’re unable to work, premiums are covered until it matures, which give you peace of mind” suggests certified financial planner Debbie Netto-Jonke. Remember, however, that as with each investment policy, there are drawbacks to keep in mind.

“If you can no longer afford the contract, you can’t reduce or stop payments without lapse conditions applying – you could lose up to three years’ worth of premiums in order to cover costs,” she explains.

“Buy adequate life insurance to protect your estate, and disability insurance to cover loss of earnings if you’re unable to work. Then buy a separate unit trust account to cover the education expenses you expect. Spreading investments this way gives you more flexibility and you don’t have to exercise the annual increase in the endowment policy premium. A monthly debit order is the best way to harness the power of compound interest over time,” concludes Netto-Jonke.