As back-to-school season starts, now is a good time to re-examine your education budget and get your finances on track.
Education has become critically important in South Africa. Dinner table conversations often see the merits of different schools discussed, as all parents want the best education for their offspring. But at what price and how to afford it?
The cost of education in South Africa varies depending on whether a child attends a public or private school.
Rita Cool, financial advisor at Alexander Forbes Retail offers the following tips to pay your child’s education:
Monthly –If you earn a monthly income remember to include school fees in your budget as it must be paid.
Annual bonus – If you use your annual bonus to pay school fees upfront, you could score a discount, therefore do the calculations to see if the discount warrants paying upfront.
Education plans –Most people use education plans for high school or university fees so the period is much longer and they don’t make all the contributions before school starts. You also don’t use up all the savings in year one, your assets continue to grow each year while you draw a portion.
Cool takes us through the different education saving options:
Tax free savings account
• Works similar to a unit trust but there is no tax on interest, dividends tax or capital gains tax charged within the fund
• You can contribute up to R33 000 per year, either as a lump sum or monthly with a maximum of R500 000 over a lifetime. If you contribute more than the yearly limit the contribution will be taxed.
• You can contribute towards a TFSA in your children’s names
• You can withdraw at any stage
Cool adds, “ This structure is good for people with self control that will not spend the money as the structure is easy and tax effective.”
Endowment (Recommended for parents in a higher tax bracket)
• Interest taxed at 30%.
• You won’t have to declare anything on your tax return.
• There is a minimum five-year term. Once this term is over, you can take money out when you need to.
Unit trusts
• The tax on this will depend on your tax bracket. If you are in the top tax bracket then:
• Interest is taxed at your marginal tax rate, maximum 45%
• Maximum Capital gains tax is 18%.
However, South Africans are allowed an annual interest exemption on the first R23 800 of interest earned per year and the first R40 000 per year earned in capital gains is also excluded from tax. Take these exemptions into account in your calculations for an endowment versus a unit trust as a savings vehicle.
• Dividend tax is deducted on dividends declared at 20%
• It is flexible, so you can add any amount any time or take money out whenever you need it to pay for school fees, sport tours or books.
Things to take into account to make your education budget stretch further:
Make a comprehensive list
Before you shop, make a comprehensive list for each child and then prioritize expenses between must haves and wants.
Student discounts
Most students need school supplies, from inexpensive notebooks and flip files to more pricey laptops and Ipads – be penny wise and ask about student discounts.
Reuse and recycle
Can your textbooks be purchased on digital media to save on cost? How about purchasing a used version? Don’t forget to sell your books at the end of the year to earn some cash. Your school might also have a second hand clothing store where you can find clothing much cheaper than buying new. Or arrange with friends with older children to get their old clothes. Pay it forward once your children have outgrown theirs.
Compare prices
As part of the planning process, compare prices before you shop for school bags and stationary. Online shopping allows for on-the-spot price comparisons. Keep an eye open for sales during the year for stationary staples.
Remember that education costs will also include:
School transport
Factor public transportation, school bus or carpool expenses into your monthly budget.
Tuckshop
Learn what your school charges for meals and weigh their convenience and nutritional value against the cost of home-prepared lunches and snacks.
Activities
Most sport is included in your school fees, but if a child wants to do extramural activities outside school, such as extra swimming or ballet classes, this should be included in planning. There could also be school tours so budget this so your child can participate in the experience.
Gifts for school parties
Your child will probably be invited to quite a lot of parties for school friends and the gifts add up over a year. Buy generic gifts on sale when you see them to have a stock available to save money and save rushing around.
Aftercare
If you’re a working parent see if the school offers aftercare and how much it costs.
Children repeat their parents’ habits, and this includes their spending habits. “It’s important to impart the message of saving from an early age to raise financially aware children.”
“While you prepare your children for their future it is important that you do not forget about yours. Raising children may mean that your budget is stretched but keep your retirement savings in mind so that you can plan for.
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