If you’re planning to save for your child’s tertiary studies, doing so early is the best way to do it.
The exciting news of welcoming a child into the world changes your life, and time can go by so quickly. Planning for tertiary education costs early, will make all the difference to affording the best education and opportunities available.
You generally have at least 18 years to save towards university costs as a new parent. So, let’s assume for a 4-year bachelor’s degree, you’ll need as much as R85 000 per year for university tuition alone. This added up seems staggering, but will be more manageable to achieve over time, thanks to compound interest (provided you start saving early).
It is important to personalise your goals to know where you are going. One way is to define which university you are most likely to send your child to so that you can better quantify your savings goal. It might be difficult to picture it now, but this will allow you to more accurately ensure that your level of monthly savings matches the future costs of tertiary studies, to avoid a shortfall. It is important to note there is a large disparity between university costs in different provinces. The cost of residence or accommodation should you want your child to attend a university out of town should also be defined as this can be more than double the cost of tuition, which changes the savings requirement dramatically.
There are a few key savings vehicles to consider using for these savings:
1. Tax-Free Savings Account (TFSA).
This has the benefit of allowing you to save up to R36 000 per tax year (capped at R500 000 over your lifetime) without any taxation on the growth of the investment. So this mean you’ll pay no tax on interest, dividends or capital gains. This should be in your name and not your child’s, as you could be removing their right to have their own TFSA later in life, due to the contribution maximum limits.
2. Discretionary unit trust or ETF (Exchange traded fund)
This is similar to a TFSA, but without the tax benefits. This should be considered if you are already using a TFSA in your personal portfolio. An ETF is an alternative to a unit trust fund, and usually tracks an index.
3. Endowment / Sinking fund policy.
This should only be considered if you are already using a TFSA in your personal portfolio and your marginal tax rate is above 30%.
As it is estimated that education inflation runs at around 9% per year, it is imperative to invest your money in the selected vehicle above in a high-growth portfolio that will target long-term capital growth at inflation plus 5% to 7% per year. This type of mandate should invest the majority of your savings in local or offshore shares. As you will be investing monthly, you gain the benefit of rand cost averaging (averaging your entry into volatile stock markets), which will smooth your return over time.
As always this advice is assumptive and generic and you should always work with a Certified Financial Planner® to tailor a financial plan to your unique circumstances, and consider the appropriate investment mandate and tax structure that may impact you.
