Personal investing
Personal investing

Investing for education

As Wanita Isaacs joins the ranks of parents investigating ways to afford the best possible education for their children, she learns that, although long-term thinking and early sacrifices certainly pay off, thankfully there are also options available for those of us who are late starters. While there is plenty of reading material that covers this subject matter, her analysis shows that the growth you earn on an investment significantly lowers the impact of education costs on your budget, even if you miss the opportunity of starting your investment at the birth of your baby.

Take the time to plan

With the cost of education soaring, comfortably affording our children's school and tertiary education fees requires careful budgeting. As with any investment plan, the sooner we start putting money aside, the longer we will have for our money to work for us. However, if, like my child, yours has already started school, do not be disheartened, investing can still ease the burden of the more expensive later years of education.

There are various ways to pay school fees and your options will naturally be influenced by your circumstances. Rather than paying all the fees from your salary, or taking out a loan, you could consider putting a plan in place which allows you to either:

To illustrate the differences between these options we analysed the cost of financing education for a single child. We assumed an inflation rate of 6% per year and, in the investment examples, contributions escalating with inflation each year. The fees used in our analysis are notional estimates for a suburban 'Model C' school and tertiary education at a major university.

Paying fees from your salary may not be the best option

Over the last 15 years, education inflation (the rate at which the cost of education increases each year) has been almost 10%, according to Statistics South Africa - about 4% higher than the general inflation rate. This means that, unless your salary increases by at least 10% per year as well, as time goes by it will get increasingly harder to make space in your budget for school fees. While fees vary, they tend to escalate at a similar rate: Table 1 is intended to give a sense of what you would be in for.

Table 1 shows the fees for our example schools and tertiary education today compared with what it could cost, in real terms, at the time the child attends each stage of school, assuming fee increases remain at the current rate of 4% ahead of general inflation each year.

Annual school fees in real terms

Weigh up greater savings versus the impact on your budget

When you invest, the returns you earn lessen the total financial impact of school fees on your budget. Our analysis indicated that if our illustrative parent paid all school and tertiary fees from her salary, the total cost could end up being almost R2.4 million.

If instead the parent in our example started investing R3 500 per month at the birth of her baby, and used the investment to fund all fees, and assuming a real return on her investment of 3%, the impact on her budget would be 29% lower. Although going this route requires contributing a meaningful percentage of your salary at a time when you may have many other financial pressures, tight budgeting upfront allows for predictability and cost saving in the future.

Table 2 highlights the fact that the longer you have to invest, the more you can benefit, since saving from birth for the later years and paying for pre- and primary school from your salary, can decrease the impact on your budget by even more.

Being a disciplined saver has another obvious benefit, in that the impact of lumpy costs like education is spread over many years. This means that, on top of the benefit of investing the money, parents who save can send their children to schools they may otherwise not be able to afford.

Table 2 also shows that the growth you earn on an investment for the later schooling years significantly lowers the impact of education costs on your budget, even if you miss the opportunity of starting your investment at the birth of your baby. Even if our illustrative parent started her investment after her child had started school, and her investment only earned enough return to keep up with inflation, investing would lower the impact on her budget by 13%.

Lower impact on budget by investing for schooling

Credit: avoid it if you can

The repercussions of not planning may be that you are forced to use a loan to finance education. Although the power of compound interest works in your favour when you invest, the same mechanism works against you when you borrow and makes credit the most expensive option - especially if you are making use of an unsecured personal loan. It is scary to think that the cost of credit to fund later schooling can work out to almost four times more than your total education costs if you had invested for these schooling levels from birth and paid for the early schooling years from your salary.

Research the investment options available

If you decide to invest for education, there are many investment products available that may suit your needs, including various specialised education policies. Allan Gray offers a range of unit trusts that you can invest in directly or via an endowment product wrapper. It is important to research the various options available, comparing costs, restrictions, expected returns and other product features and benefits.

At Allan Gray we do not offer financial advice, however, we believe in the merits of using an independent financial adviser to help you make these complex investment decisions. An independent adviser can help you to assess your current and future financial situation and recommend the most suitable course of action. He or she can help you make investment choices such as how much to save, which product and which underlying investments are right for you.

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