Avoid these mistakes when saving for your kids’ education
Last updated on 13th December, 2017 at 10:22 am
The high cost of educating your child calls for forward planning. As a parent, there’s no better time than now to start saving.
It’s often said that the greatest gift you can give a child is the belief that the future is full of possibility. With SA’s high unemployment rate, a tertiary education is key to opening as many doors as possible for your child. But education is not free. How do you avoid common mistakes and make sure there’s enough to get them onto campus?
Underestimating how much money you’ll need Currently the average cost of a local three-year degree is about R120 000, according to Old Mutual’s research. If current education inflation of 9% persists, it will cost you more than R560 000 to get your newborn through university 18 years from now. And we are only considering the academic fees here. Residential and living expenses could triple that figure.
Leaving it too late To build up the required R560 000 over 18 years, you would need to invest R930 per month in an investment product that beats consumer inflation (6%) by at least 4% per year. The later you start, the more money you will need to put away every month. If earning extra income is not an option for you, prioritise your child’s education by cutting non-essentials wherever you can. For example, do you really need satellite TV at R750 per month?
Failing to increase your premium every year Increasing your contribution amount every year will make a huge difference. If, for example, you commit to increasing the amount by consumer inflation every year, you need to start out with only R697 per month in your first year, not R930.
Avoiding high-risk products If you are investing for as long as 18 years, you can afford to take on the risk of investing at least some of your savings in equity (stocks and shares). The above calculations were made assuming that your investment beats consumer inflation by 4%, which requires equity exposure. But if you invest R697 per month (increasing the amount by consumer inflation every year) in a product that beats consumer inflation by only 1%, you will have a shortfall of more than R130 000 after 18 years. By contrast, if you invested in a fund that beats inflation by 4%, you would have met your goal. Your choice of the right type of portfolio is crucial to your investment success.
Paying high fees Take care when investing through an older-generation education policy, which may have built-in commission or other product costs. If you are investing through a unit trust or newer-generation policy that allows you to choose the underlying funds, keep an eye on the fund manager costs. Fees will drag down investment performance, making it harder for you to reach your goal.
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