‘A good education … is one of the best investments you will ever make’.
‘A good education … is one of the best investments you will ever make’.
Parents hope their children will make it far in life. They see future doctors, ballerinas, scientists and award winning actors when the babies are still squealing in their strollers. But without a solid education these dreams may not be possible in our increasingly competitive world.
“A good education for your child becomes possible the moment you start saving for it,” says Iain Anderson, a fund manager at Sygnia Asset Management.
“It is one of the best investments you will ever make. Education opens doors to job opportunities and expands earning potential.”
However many parents are often dumbstruck when they realise how expensive a good education can be.
Education inflation increases annually by 8% to 9%, which is about 3% higher than consumer price inflation (CPI) – easily outstripping most salary increases.
Anderson says three years of university education will currently cost R300 000 to R350 000 for tuition, books, room and board and other expenses such as a computer, cellphone and internet access. Adjusted by real education inflation of 3%, it equates to R850 000 to R1 million by the time your six year old attends university.
And one degree may not be enough, he cautions. The working environment is very competitive and to increase your child’s potential of finding a decent job, they may need further degrees or diplomas, whether in South Africa or abroad.
He advises that parents should do the research themselves. They can get a good idea of current education costs by phoning schools or tertiary institutions. There are also websites and education calculators on the internet and they can get guidance from an independent financial advisor.
For example, your child is currently 6 and you want to save until he is 18. Anderson calculates that contributions of around R2 600 to R3 000 per month will be necessary to save the approximate R1 million over this period of time, given a real return of 6% on an aggressive equity investment (excluding any individual tax considerations).
This may sound too much for many parents, especially if they are debt strapped and currently paying existing school fees. But no matter how much you can contribute, the earlier you can start saving the better.
“Don’t be overwhelmed by the costs. 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.”
To beat education inflation you will have to invest in an instrument which strongly outperforms CPI. Furthermore, you should compare costs – there are a myriad of investment plans, many with high fees that could take a huge bite from your earnings in the long term.
“Try to keep it simple, for instance consider a low-cost passive vehicle which can offer you the required returns in the long term,” Anderson recommends.
He says if you have time in the market, (if you start saving when your child is Grade 1 until he is Grade 12 for example), you can invest more aggressively and ride out market fluctuations.
“Individual risk profiles differ, but as you need maximum growth I would suggest considering the most aggressive risk exposure you are comfortable with.”
Anderson views a tax-free savings plan (TFSP) as a very efficient investment vehicle. The main advantage is that no dividend, capital gains or income tax is payable, so your money can grow faster than in a regular savings account.
The longer you invest, the more benefit you will get from a TFSP, provided you keep within the annual threshold amount of R30 000, and the lifetime limit of R500 000.
He says although monthly contributions of between R2 600 and R3 000 will take the investor beyond the current lifetime limit there is a reasonable chance this limit will be raised by government as time passes.
He cautions however that you should carefully consider in whose name the TFSP will be. You can literally open a TFSP as soon as your child has an ID number, but then 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.
Your ability to teach your children about their need for tertiary education will determine the wisdom of your investment choice.