“Saving for your child’s future”

Gavin Smith, head of deVere Acuma.

One of our biggest foreseeable expenses - our child’s education and future - is often the one for which we are least prepared.

“Savvy investors are generally good when it comes to their retirement savings, yet a surprisingly large number don’t put money aside in a similar way for their child’s education and future,” says Gavin Smith, head of deVere Acuma, a global financial advisory firm.

Smith says that many people treat education bills as ad-hoc expenses and are often shocked at the amount, without realising this is something for which they could have easily saved and prepared.

“Due to expenses being more immediate than retirement, many parents just come up with the money as it is demanded. But, saving for education can easily be planned for,” says Smith.

For young parents, the first shock comes when they are aware just how expensive pre-school fees are. It is compounded when they start to realise that there is an incremental increase in fees ahead as their child moves through different levels of education.

“If they haven’t started saving early enough, this can put a major dent in their finances. It’s therefore good to start investing for their children’s future education costs as early as birth,” says Smith.

According to global research by HSBC, 72% of parents of pre-primary school children think they will fund their children’s future university costs through savings, and only 14% think they will rely entirely on day to-day income.

In reality, however, among parents whose children are currently at university, only 53% are using or plan to use saved funds, and 30% are reliant or expect to rely entirely on day-to-day income.

Among those who did not save for their children’s university fees, 52% said they did not have enough money left to do so after paying bills, while 23% said they had just not given it any thought

More than a quarter of parents have taken out a loan or expect to cover university costs, and expect to spend on average 6.7 years repaying the debt after their children have finished their education.

While these statistics do not include South Africa, they do include a number of developing countries. “The situation in South Africa is likely to be worse given our poor savings culture,” says Smith. “Our experience bears this out. People overestimate their ability to save and underestimate the extent of their future financial obligations. This is why it is so important to make sure you are planning for your child’s future.”

“The first step is to start saving regularly by putting monthly payments into a dedicated savings or investment plan designed in consultation with your financial adviser,” Smith explains.

In South Africa in particular, an increasing number of parents opt to send their children to private schools. For those fortunate enough to have their child attend one, they face private education fees that increase on average by 10% per annum (against a CPI increase of 6%) in addition to the base level increase (increase at every new level of the education system).

This puts the total investment figure at R3 million to R4 million required to fund a child through both school and undergraduate education, depending on the institution of course.

“If parents have the ability to save for more, all the better,” says Smith, “to cover significant additional costs like uniforms, textbooks, extramural activities (nearly all are charged for separately), various levies imposed by the school, school tours and transport.”

He says that because of the higher than inflation increases and growing list of extras, most parents cannot simply pay for education without having a savings cushion in place. They need to invest for it, making additional contributions wherever possible.

“For many young people starting off a family, day-to-day living expenses override any ideas of saving,” he adds. “Many spending on more than they should like, expensive cars and furniture.”

Putting money aside for education is far more important at this stage and will ensure that over time, they are in a better financial position overall.

While education is often the overriding preoccupation when parents think of saving for their children, it is equally important that parents ensure their children are looked after should they die, become disabled or are unable to work. “Parents should, as a priority, make sure they have adequate life and disability cover to ensure their children are protected. Your income is your most important means of providing for your children and it needs to be protected as a priority,” Smith says.

Providing for your children financially also means you have to prepare them for their own financial future. “Depending on a parent’s financial position, they should open a savings or investment account for their children so they can learn about saving and get a good start to their own financial wellbeing”, says Smith. “Putting aside just a little each month from when they are young will result in them starting off their own financial journey with a significant advantage.”

“Lastly, parents should make sure their own financial affairs are in order so that their children’s inheritance is easy to locate and distribute should they die,” says Smith.

“Parents should consult a specialist, independent financial adviser early on to ensure that the right strategy is implemented, give them peace of mind that they’re on track to raising the necessary funds to give their child the gift of a perfect education and a solid financial future,” Smith concludes.