Personal investing

PART 2: Saving for education – later is still better than never

When it comes to paying for the best education for your child, making small sacrifices early on and taking a long-term approach to investing is the smart thing to do. However, if you are starting late – like many of us – there are options to help you reduce the impact of school fees on your monthly budget.

Most parents will agree that the best gift you can give your child is a good education. However, the cost of one these days is sobering – especially if you didn’t start saving immediately when your child was born. 

A recent report by Discovery Life shows that educating your child from preschool to tertiary level in the private school system can cost as much as R2.5 million per child. While public schooling is more affordable, it is not necessarily cheap, with school fees in the large metropolitan areas averaging R40 000 a year. 

The report also found that expenses such as uniforms, laptops and tablets (if the school uses digital learning), school trips and sports equipment can increase your expenses by as much as 50%. 

What are your options?

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. What this means is that education costs are increasing at a faster pace than our salaries can keep up with. Over time, it will become increasingly difficult to afford school fees from your monthly salary.

The return you would earn on a long-term investment could significantly reduce the impact of education costs on your monthly budget. You can read more about options available to you in Part 3. But if you are a late starter (like 57% of South African parents), don’t despair; there are other options to lessen the impact of fees. Although the short-term results may be less gratifying, these options can still help alleviate the pressure. 

Did you know that 43% of parents are saving for their child’s education?

Short-term investing: Paying school fees upfront for the year

Many schools offer discounts if you are able to pay fees in full at the beginning of the year. This discount can range from under 2%, to one month free (which works out to an 8.3% discount), to as much as 10%, depending on the school. 

If you settle fees upfront, you are not only paying less overall, but it would provide much-needed relief in your monthly budget. 

Many parents use their year-end bonus or a 13th cheque to settle fees upfront. It would only be worthwhile to borrow money to cover fees if the interest on the loan is significantly less than the discount offered for early payment. 

Cash lump sums

If you have a cash lump sum, it is a good idea to use it towards school fees. There are two ways you can do this: You could take up the discount and pay the school upfront, or you could invest the money and make a monthly withdrawal from the investment to pay fees. 

The answer for which option is best for you depends on your investment returns and the discount offered.

Using a figure of R40 000, which is the average of school fees in the large metropolitan areas, and assuming you would invest in a short-term investment such as a money market account (which carries less risk of market volatility) earning an average return of 8% (based on average money market fund returns at the time of writing), our research found that if the school offers a good discount (anything from 5 to 10%), then it is worthwhile paying the fees upfront for the whole year. 

However, if the school offers a small discount, up to 3%, it is better to invest the cash lump sum and pay fees monthly from the investment. 

For example, if you invested the cash lump sum of R39 200 (the amount you would have paid to the school, with a 2% discount) and withdrew every month for fees, you would have R623 left in the investment account at the end of the year.  

If the school offered a 3% discount, and you took the same route, you would have R191 left at the end of the year after paying all the fees. 

However, if the school offers a bigger discount, anything from 5%, it is better to use your cash lump sum to settle the fees upfront. For example, if you were to invest that cash lump sum, using the same assumptions as above but working on a discount of 5% and higher, you would run out of funds in the investment by the 11th month and have to pay December’s fees from your salary. 

Monthly contributions

Another approach is to invest enough monthly to pay the discounted fee upfront at the beginning of the following year. 

Using the same assumptions as above (i.e. R40 000 in average school fees and an average return of 8%) to get an idea of your potential return, and bearing in mind that past returns are never a guarantee of future returns, if you invested R3 000 (about R300 less than you’d be paying in direct fees) every month starting in January, by December your investment would be worth R37 542, including returns. If you were offered a 10% discount for early payment, then you would be left with R1 542 in your investment account after paying the fees. 

Read how one Johannesburg mom is doing just that here. 

Investigate the best investment option for you

While making a plan to alleviate the short-term pain is key, try to make space for long-term investing as soon as you can. There are many investment accounts and policies you can use to save for your child’s education. It is important to research the various options available, comparing costs, restrictions, expected returns and other product features and benefits. Part 3 of this series will help you to understand the options. 

It is also a good idea to consult an independent financial adviser to help you select the right financial products to meet your specific goals.

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