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Personal investing

CASE STUDY 2: Long-term investing for your child’s education

Meet parents Wayne and Makgabo van Niekerk from Johannesburg. They are paying for Ceana (six) and three-year-old Amber’s early education (crèche and primary school) while saving for the more expensive high school fees.

They would like to send their daughters to a private high school in their neighbourhood. The fees at that school are currently R60 348 per year, per child. When the eldest was born in 2012, Wayne and Makgabo began monthly contributions of R650, with a 10% annual escalation, into a unit trust investment. They doubled their contributions in 2015 when Amber was born.

Based on the girls’ ages, the couple will make their first withdrawal from the investment in 2025 when Ceana starts high school.

Assuming an investment return of 3% above inflation (based on long-term balanced fund returns), by 2025 the investment would have grown to R562 274 in nominal terms. However, they would run out of money in the investment when their youngest starts grade 9 – a four-year shortfall on their savings goal.

Even if you consider up until the point their investment can no longer fully fund a year of school fees, they would have contributed a sum of R707 212 over a period of just 18 years. Meanwhile, the sum of high school fees paid is R1 094 023 (with a 10% escalation every year) over a period of five years. This means that compared to paying fees from their salaries, by the end of the period they would have contributed 35% less than what they would have spent on high school fees in nominal terms.

Here’s something else to consider: If the couple had made a small increase to their monthly contributions, they would have saved enough to cover both daughters’ fees. If they had begun with a R770 contribution as opposed to R650 per child, with a 10% escalation, they would have contributed a total of R1 152 181 over a period of 21 years. The sum of high school fees paid is R1 673 581 over a period of eight years, meaning they would have contributed 31% less than what they would have spent on high school fees – simply by letting the power of compound interest work for them over the long term.

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