The before-baby to-do list

Picking baby names and smelling tiny little baby clothes is far more fun than thinking about how you’re going to pay for your newborn’s tertiary education. But financial planning for your baby is far more important, so we asked our experts for their advic

IT’S NEVER TOO late to become financially savvy, says certified financial planner Duncan Fraser of DBF Financial Planning and Wealth Solutions, who adds that being pregnant can be the nudge you needed to get your financial affairs in order.

START WITH THE MOST BASIC STEP:

working out exactly how much you spend each month in order to know how much you have to save for your child’s education, medical cover or savings, life insurance and good old fashioned saving and investments. Ideally, you should be putting at least 20 percent of your income towards all this. If you can’t manage 20 percent, Duncan suggests aiming for 10 percent and gradually bumping it up as you become more financially stable.

THEN YOU NEED TO DECIDE HOW MUCH OF THAT 10 TO 20% WILL GO TO:

1 MEDICAL SAVINGS “The medical bills incurred during pregnancy can ruin your financial plan and riddle you with debt,” warns Marcel Wasserman, a financial advisor with T&E FinOps. To avoid this, he says expecting parents should save between R20 000 and R50 000 for their new baby – the higher end of the spectrum if they aren’t covered by medical aid and want to give birth at a private hospital. “While it’s free at a public hospital, a C-Section with no medical aid is around R40 000 at a private hospital and a natural birth can cost around R20 000. “Then, after baby is born, consider a family medical plan or, at the very least, some form of medical savings for emergencies.” 2 EDUCATION “A good education for your child is one of the best investments you will ever make. Education opens doors to job opportunities and expands earning potential,” says Iain Anderson, the head of investments at Sygnia Asset Management. While it may be tough to put money aside now, you’ll thank yourself later because education costs increase annually by around 8 to 9 percent – which is higher than inflation-linked salary increases. Iain advises parents to research the cost of education based on what type of education they plan for their child, then calculate how much to save each month. There are websites and education calculators on the internet to work this out, or ask an independent financial advisor for advice. “Don’t be overwhelmed by the costs,” adds Iain. “Tertiary education is expensive, but the benefits far outweigh the sacrifice of putting money away for it. Any amount that you can save will make a difference.” How you save is also important because high fees and tax can whittle down your savings over the years. Iain suggests a tax-free savings account (TFSA), which government has introduced to encourage South Africans to save. TFSAs come in many different forms, from fixed deposit bank accounts with set interest rates to unit trust funds. The common factor is that there is no tax on your savings, ever, which means that your money can grow faster than in a regular savings account or investment fund. The minimum monthly contribution depends on which bank or asset management company’s TFSA you choose, but it’s usually around R500 per month. However, you cannot exceed the yearly maximum contribution of R33 000 per year or the maximum lifetime contribution of R500 000, otherwise you will be taxed heavily (up to 40 percent on the excess contribution). But just because your TFSA contribution is limited does not mean your earnings are, stresses Mariska Redelinghuys, Sygnia’s retail legal advisor. “There is absolutely no limit to how much your TFSA investment can grow. So if you choose an incredibly well

performing fund, you could double, triple of even quadruple your savings with no ramifications. That’s how a tax-free savings account can really work for you.” You may open up a TFSA in your child’s name, but remember that each person is only allowed a lifetime TFSA contribution of R500 000, so whatever part of that amount you invest into the account on your child’s behalf will affect their own future tax-free savings contributions. Iain also points out that, technically and legally, it is the child’s money, so if your child turns 18 he may decide to spend it on a trip to Europe rather than using it to get a tertiary education. Another option is the governmentdriven Fundisa. It’s a low-cost, low-entry savings option that enables parents to start saving for their child’s tertiary education from only R40 a month. Government then “rewards” parents for saving by adding a bonus subsidy each year. This bonus subsidy is capped at a maximum of R600 and it works on a sliding scale; the more you invest, the bigger the annual bonus from government is. For example, if you invest the minimum of R40 per month, your annual bonus subsidy from government will probably be around R100 or R200. Whereas if you invest R200 per month, you will get the maximum R600 subsidy. It may seem like a small amount, but if you invest R200 a month and receive the additional R600 a year bonus from government, your Fundisa savings will grow to around R50 000 over 10 years. But remember: government’s bonus subsidy is only paid out directly to a tertiary educational institution. So if your child chooses not to study further, that bonus money will not be paid out in cash or any other form – it’s gone. 3LIFE INSURANCE If you die without a final will and testament, all core decisions about your child’s care and inheritance fall into the control of the state. So it’s vitally important to draw up a will and appoint a guardian (or guardians) to raise your child in the event of your death. It doesn’t have to be a hugely expensive or detailed task; nowadays you can do a will for a nominal fee online. Also, be wary of banks that offer to create and store your will for “free” – often they have clauses in the paperwork that make them the executor of your estate, which means the bank can end up deciding what happens to your house, how much to spend on your child’s education, and more. And they may pay themselves from your estate for doing the job. Then there’s the issue of who will pay for your child’s upbringing and education should you pass away. Marcel advises buying a live insurance policy – particularly one with a “pregnancy complications severe illness benefit” – and making your child the beneficiary. There are a ton of options available and not all of them are good deals, so always be sure to do your research, read the fine print, buy only from a registered life insurance company and to get trusted, independent advice if needed. 4RAINY DAY FUND Having some money set aside for unforeseen costs and emergencies can make a world of difference to a young family, says Duncan. Again, how you save for that rainy day can make all the difference. Some investment vehicles, like traditional (actively managed) unit trusts, carry a few different fees that can eat away at your savings over time. When you consider that high fees can cost you up to 60 percent of your investment over 40 years, according to National Treasury, it’s clear why low-fee savings vehicles are so important. A TFSA is also a great rainy day savings vehicle, as you pay absolutely no tax on it and there is no limit to the growth on your investment. Also, government has put restrictions on how much in fees can be charged on TFSAs, notes Mariska, so the fees are generally not very high. Importantly, she adds, you are able to withdraw all or some of your savings from a TFSA within as little as seven days.

TERTIARY EDUCATION IS EXPENSIVE, BUT THE BENEFITS FAR OUTWEIGH THE SACRIFICE OF PUTTING MONEY AWAY FOR IT