Sinenhlanhla Nzama, investment marketing actuary at Old Mutual.
At the start of every new year, we feel the strings on our purses being pulled by the rising cost of our children’s education expenses. And with education inflation surpassing general inflation of 5.8% and rising to 10% this year, the future won’t get easier.
The long-term solution? Start saving today for your children’s education.
“We all want the best for our children and this means getting them a good education to ensure that they become both financially independent and fulfilled in their careers,” says Sinenhlanhla Nzama, an investment marketing actuary at Old Mutual.
“Providing your children with a good education is the best gift you can give them, but the reality is that only 27% of urban South Africans are actively saving for their children’s education, according to the 2014 Old Mutual Savings and Investment Monitor. Our stats show that when people are tightening their belts, saving for education is unfortunately one of the main areas where budgets are cut.”
The case for forward planning and saving for education is strong. With education inflation outstripping most salary increases for the foreseeable future, school fees will be taking an increasingly bigger chunk out of your monthly salary.
So what costs are we looking at?
The tough reality is that in 2015, one year’s education could cost between R27 000 and R105 000, depending on the level (primary school, high school, university) and type (private, public) of education. A 2021 forecast will see you spending between R45 000 and R176 000 for one year’s education (see table below).
If your child is starting grade R this year, the combined cost of education is expected to be R1 082 000 for public schools and R2 431 000 for private. This includes primary school, high school and a three year university qualification (see table below).
Empower yourself with a plan
“Whether you are new parents, a single parent or an established family, the key is to start saving early,” says Anele Mbuya, also an actuary at Old Mutual. “Life can be very demanding so parents have to be aware of the future cost of quality high school and university education. The later you start saving, the more you will need to save per month.”
For example, looking at the figures in the table and assuming a 10% investment growth before fees, you need to save about R530 a month for university tuition (excluding accommodation, books and travelling costs) if your child is born in 2015. However, this is about R1 050 (close to double) if your child is already 10 years old! These monthly savings will also need to be increased by 9% a year going forward, to keep up with the higher education inflation. It is very important that parents invest in growth assets when saving for their child’s education to ensure they receive returns that are above education inflation. This may not be possible through normal savings accounts.
Investment vehicles to save for education
• Unit trusts
Many people choose unit trusts for long-term investments as there is a lot of choice as well as funds that specifically focus on beating the rate of inflation by a certain percentage. This is important because education inflation is higher than normal inflation.
“Unit trust investments are ideal for people who require flexibility and access to the funds. However you must be disciplined and avoid the temptation of dipping into your child’s funds,” says Nzama.
• Savings policies
These are fixed for a certain period of time, say 5 to 15 years, depending on when your child will go to school or university. You can either pay fixed monthly premiums or make a lump sum payment into the policy.
You have limited access to the savings, which are generally invested in a wider range of the leading unit trust funds of your choice. You can also choose to invest in some of the available life funds that offer minimum guarantees. These life funds are only available from life assurance companies.
Many policies offer a protection of premiums in the event of the death or disability of a parent. This means if you were to die or be disabled and unable to work, the insurance company will pay the premiums for the remaining period.
• Fundisa
This is a government initiative enabling you to save towards an accredited qualification at either a public college or university. You’re paid an annual bonus on the investment, which can be up to 25% of the money you save annually up to a maximum of R600 per child. If you save R100 a month (R1 200 a year), you will get another R300 a year.
To receive the maximum bonus of R600, you have to save R2 400 a year. The bonus can be used by the learner. You can withdraw your own money but will then lose the bonus.
• Tax-free savings
To encourage savings in SA, the government will be introducing a new tax-free savings vehicle. Any interest, dividends or capital gains will be tax-free. South Africans will be able to save up to R30 000 a year or R500 000 over their lifetime in the tax-free savings accounts. They will be able to withdraw these savings at any time, without disinvestment charges other than a transaction fee.
“Start early, even if it’s only a small amount each month,” says Nzama.
Speak to your financial adviser who will help you choose the appropriate savings vehicle and give you advice on how much you should save to secure a good education for your children.
Tables
Cost of one year’s education in 2015, 2021, 2029 and 2034
Total cost of education (if starting Grade R in 2015)
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