Personal investing

CASE STUDY 1: Investing to pay school fees upfront for the year

A Johannesburg mother saves on fees by taking advantage of the discount offered by some schools to settle the year’s fees in full at the beginning of the year.

According to Statistics South Africa, education inflation (the rate at which the cost of education increases each year) has averaged 10% over the past 15 years – that’s about 4% higher than the general inflation rate. This means that education costs are increasing at a faster pace than our salaries can keep up with. Over time it will become very difficult to afford school fees from your monthly salary. 

The ideal approach is to take a long-term view and start saving for your child’s education as soon as they are born, but it’s not the end of the world if you are a late starter. There are short- and medium-term options to help ease the burden of school fees on your monthly budget. 

For the past three years, Johannesburg mom Khensani Maluleke has adopted a short-term approach and saves up to pay her daughter’s school fees upfront at the beginning of the year. 

The school offers her one month free – which works out to an 8.3% discount – if she pays upfront. In 2018, her daughter’s fees came to R20 955 including aftercare. 

She contributes R1 700 every month into a tax-free investment (TFI) with her bank and her investment earns a return of around 5.7% (returns are not necessarily guaranteed and will vary depending on your provider). By the end of the year, she has enough saved up to settle the fees for the following year in full and, in doing so, reduces the impact of education costs on her monthly budget by 10.7%. 

She also tops up her contributions with an ad hoc cash lump sum when she receives her annual bonus in March, which allows her to earn returns on this amount and helps cover fees in future years.

Khensani says this approach also gives her the peace of mind that should she lose her job, her daughter’s education would be covered for a while. 

While she is definitely on the right track, a TFI may not be the best investment vehicle for her particular savings goal. The maximum that you can currently contribute to a TFI is R33 000 per year with a lifetime limit of R500 000 (this includes all the TFIs you may hold at different financial institutions) and you cannot ‘replace’ any amount you withdraw. With these limitations in mind, Khensani could consider a basic unit trust investment that has a low risk profile but offers higher returns than a bank deposit. 

Investigate the best investment option for you

There are many investment accounts and policies you can use to save for your child’s education. Allan Gray offers a range of unit trusts that you can invest in directly, via a TFI or an endowment. It is important to research the various options available, comparing costs, restrictions, expected returns and other product features and benefits. It is also a good idea to consult an independent financial adviser to help you select the right financial product to meet your goals.

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