Personal investing

The top four mistakes to avoid when saving for education

As parents, we all want the best for our children, and this often includes being able to give them the best education that we can afford. In the journey to saving for your children’s education, it is oftentimes the small adjustments you make along the way that can mean the difference between having enough, or falling short, when the time comes to pay for education.

Shift your mindset

Sometimes, the thought of saving for education is so daunting that it leads you to making avoidable investment mistakes or not making any investment decisions at all. Shifting your mindset away from saving to match the total cost of education or not saving at all, to saving as much as possible, is the first step towards alleviating the impact education fees will have on your future salary. Understand that the more you save, the more freedom you will have to choose from a wider variety of school options or to lessen the burden on your budget.

Below are the top four common mistakes parents make when saving for education and how you can avoid them:

Mistake #1: Not doing your research

Saving without having researched the various investment products available to you, could cost you money in the long term.

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. Make sure you choose a product that suits your needs to avoid unwanted fees or tax implications.

A few examples of products that are typically used for saving for education include education policies with insurers, endowments, tax-free savings accounts and unit trusts. Each product comes with its own pros and cons, and which one you choose will depend entirely on your own needs, personal circumstances and investment goals. Speak to a financial adviser to help you if you are uncertain as to which product would be right for you.

Mistake #2: Dipping into your child’s education savings

Life doesn’t always go as planned, which means that you may be tempted to dip into your child’s education savings if the opportunity presents. You may think it will be easy to ‘catch up’ at a later stage with additional contributions. But doing this means you will miss out on the full power of compound interest.

Time is an essential ingredient to successful investing. The sooner you start, the more time you will have to make contributions and to benefit from the magic of compounding: earning returns today on the returns you earned yesterday.

Mistake #3: Not budgeting for the long term

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 4% higher than general inflation.

Not budgeting or planning adequately for the rising cost of education, and not accounting for education inflation, may put a lot of pressure on your monthly budget.

Mistake #4: Using credit to fund education

It is not uncommon for parents to turn to credit to fund their children’s 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.

If you commit to a long-term savings plan when your child is born, it is less likely that you will find yourself in such a situation.

For more guidance on how to save for your child’s education, sign up to receive our five-part Saving for education series.

The financial services, products or investments referred to on this website are not available to persons resident in jurisdictions where their availability or distribution would contravene local laws or regulations and the information on this website is not intended for use by these persons. This website is for information only and does not in any way constitute a solicitation or offer by Allan Gray Proprietary Limited or any of its associates or subsidiaries (collectively “Allan Gray”) to buy or sell any financial instruments or to provide any investment advice or service.

By selecting one of the countries below I confirm that I have read and understood the above and that:

(a) I am not a South African citizen; or 
(b) I do not reside in the Republic of South Africa; or 
(c) I am not otherwise a person to whom the communication of the information contained in this website is prohibited by the laws of my home jurisdiction; and 
(d) I am not acting for the benefit of any such persons mentioned in (a),(b) and (c) and 
(e) I confirm that any investment with Allan Gray is based on my own initiative and not due to any offer or solicitation by Allan Gray.