A savings a day keeps the debt at bay

Education is becoming an increasingly important investment clients have to consider when planning to have children. We all want the best for our kids, and quality education is the cornerstone of this ambition.

It is that time of the year when most clients should be taking stock after the holiday season’s spending, or overspending, and getting their financial matters in order. One of the best ways to do this is by updating personal budgets, and setting goals for the year ahead.

Maintain financial discipline

One major goal that clients with children should be focusing on is the ever-increasing cost of education. These costs, similar to medical costs, are escalating well above inflation, which translates into parents making greater sacrifices and maintaining financial discipline.

A recent article by BusinessTech revealed that of the top 22 private boarding schools in South Africa, the average annual school fee amounts to approximately R169 200 a year. This is a significant annual cost and not all parents with children attending these prestigious schools are from wealthy families. So, if a discount is on offer, it sounds quite attractive.

Whether or not this is the best financial decision, needs to be discussed, and my advice for your clients is to consider the below when making this decision.

Capitalise on the elusive discount

The average discount offered for an upfront school fee payment varies across public and private schools, but tends to be in the region of 5%. Some offer as much as 10%, others offer as low as 2%, while some do not offer any discounts at all.

At the top end of the private school fee model, a 5% discount would amount to an R8 460 annual saving. If your client is debt free and liquidity is of no concern, then it will be a very easy decision to make and whatever discount is offered should be grasped.

But 5% is not enough of an incentive for the majority of clients who have outstanding short-term or long-term debt. The cost of debt in most circumstances is far higher than 5%. The right advice would be to remind clients that a better financial goal would be to use any spare lump sums for reducing debt rather than settling school fees.

Follow up on retirement savings

As we are in February, the “retirement annuity season”, you should be checking that your clients have maximised their deductible contributions to their retirement annuities, which should be 15% of their non-retirement funding income. A client at even the lowest marginal tax rate will stand to gain significantly more via a tax refund than the average 5% school fee discount.

Some debt-free clients who have maximised their retirement annuities contributions may enquire about withdrawing money from their discretionary investments in order to pay school fees. At a mere 5% discount, I would advise against this. However, new lump sum cash inflows could be allocated. The question is whether your client would like to take a 5% guaranteed return over the next one year period, or whether their existing investment portfolio is offering a more attractive yield despite the associated risk.

At a higher school fee discount offer of say 8% or 10%, I would be inclined to lock in that gain at no risk to the client and therefore a withdrawal from an investment could be a wise option.

Do not touch the retirement fund

Under no circumstances would I advise that a client’s retirement assets be accessed to pay for school fees. Educational costs should only ever be funded from earnings and never at the detriment of a client’s retirement saving.

In conclusion, a good general rule then is that most people are better off expensing their children’s school fees monthly, and rather targeting debt with any free cash flows or monthly savings. Debt reduction is always a far better yielding investment.