The secret to beating education costs
Last updated on 22nd January, 2020 at 10:22 am
With time and the right savings vehicle, you can secure a bright future for your children through the power of compound interest. Read on for expert advice for growing your children’s education fund.
Why it’s important to start now
“Starting early is the most important factor you can control when saving for your child’s education,” says Jaco van Schalkwyk, a Certified Financial Planner® at Plan-B BlueStar. “The majority of the benefits of an investment accrue over the longer term, especially after 10, 15, 20 or 25 years.”
To save for your child’s high school or tertiary education, you’d be looking at medium-term saving, starting from the time they’re born – preferably even before – to reap the greatest benefits of compounding, i.e. growth of interest on interest. Even if you put away R250 per month, you can form a habit, and increase your contributions over time.
Choose your savings vehicle
“For most investors, starting a unit trust would be the most appropriate choice for saving for education costs,” says van Schalkwyk. These are accessible, and can be withdrawn within as little as 48 hours for emergencies.
With this said, your marginal tax rate could mean endowments are a better option for you – though these involve higher costs than unit trusts. “Taxpayers with high marginal tax rates (31-45%) could benefit from endowment policies to reduce their overall tax burden on their investment returns,” he adds.
Choose your fund
Van Schalkwyk suggests different funds, depending on the term of investment you’re aiming for.
Suggested fund: Sanlam Investment Management Inflation Plus Fund
Risk profile: Cautious
Maximum equity exposure: 40%
Available as a unit trust fund, the SIM Inflation Plus Fund can also be used in a tax-free savings account, and aims to deliver smooth, positive returns on its multiple assets, including equity, bonds, money market assets, and locally and internationally listed property.
Medium- to long-term
Suggested fund: Sanlam Investment Management Balanced Fund
Risk profile: Moderate
Maximum equity exposure: 75%, which makes it less volatile than a general equity fund.
This multi-asset fund is available as a unit trust or a tax-free savings account, and includes capital exposure to money market funds, bonds, listed property and up to 30% in offshore assets.
Use this handy free online tool to calculate how much you’ll have to put away monthly to reach your child’s education savings goal.
Understand your fund
“As the investment term becomes longer, the asset allocation in respect of cash and bonds reduces in favour of equities and property, which are growth assets,” notes van Schalkwyk. While these assets may be more volatile, they are suitable considering the longer investment term. “They also provide the best long-term outperformance of inflation. This should be a particular focus for investors,” he adds.
How do they perform?
“Although recent years’ performance of equities (5 years – 5.8% annualised) in particular has been subdued, the long-term returns still look good (15 years – 14.7% annualised),” shares van Schalkwyk.
Read this for other must-dos to secure your child’s future.
Start prepping for your children’s future today: meet with a qualified financial planner to help you choose the right investment for your needs.
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