Educating children can be one of the most expensive costs.
The amount of money needed to be able to send them to a school of your choice will depend on whether you want your children to go to public or private school and whether they plan to go to University. For example, if you send two children to a private high school which costs on average $10,000 per year per child (that’s a modest fee example, some can be $20,000 per year per child plus), then by the time they both finish school, you would have spent over $100,000 on school fees. And, that doesn’t include the extras for uniforms books and school camps, etc, or the increase in school fees over time (inflation).
Even if you earn a good income, to be able to save $100,000 ready in time for high school, you need to start early. The earlier, the better. The earlier, the less you need to save each month. For example, if you start an investment with $2,000 and earn 5% p.a. (reinvested for compound growth), you would need to add $437.11 per month, in order to reach $100,000 in 13 years (high school start age).
Graph: Child Education Savings Example
The lighter pink portion represents your investment earnings ($29,811 over 13 years). You contribute (invest) a total of $68,189 + investment earnings $29,811 = $100,000. If $437.11 per month is unaffordable for your budget, then you need to increase the timeframe, increase the investment earnings or choose a cheaper school.
If you save a lesser amount, the outcome in 13 years would reduce to:
• Invest $2,000 plus $100 per month = balance of $25,828
• Invest $2,000 plus $200 per month = balance of $47,830
• Invest $2,000 plus $300 per month = balance of $69,833
Even if you don’t save the exact amount you need, by the time you need it, something will be better than nothing. Remember, it’s your choice to have children. So, if you do decide to go down that expensive road, don’t be financially reckless.
Investing in your child’s name
At the very least, you should start a savings account for baby, as soon as possible, preferably when you find out that you are expecting. If not, then start when the baby is born. If you are past that point in time, then start now. Whether the savings are ultimately used for baby’s education or another purpose – such as baby’s first car or home loan – the important thing is to have some savings on hand.
Perhaps one of the simpler and simpler ways is to open a bank account in the name of the child, although this approach has its limitations. Children or minors can only earn a small amount of income before they are taxed through the roof. This may be an early option when the savings balance is low; however, as the balance increases, you need to be careful to ensure that the interest or income earned does not exceed $417. So if your child’s savings account has $10,000 and the yield is 4.00%, you will be close to the threshold.
Investing in the name of parents with lower incomes
If a member of a couple does not have a job or works part-time, their marginal tax rate (MTR) may be lower. Therefore, holding an investment or savings account in the partner’s name with the lower MTR may be beneficial, to reduce the tax payable on investment earnings. However, you should also consider that partner’s future plans to resume full-time work.
If you more money to invest for your children, family trusts may be a good choice. Although you need to seek professional financial advice and management costs, family trusts can help you legally allocate investment income and use lower marginal tax rates for certain family members.
If you are considering setting up a specific education fund, you should check the following to ensure that the product is right for you and your long-term financial plan.
⦁ What fees payable?
⦁ How much money do you need to invest? Are there any minimums to meet?
⦁ Can other people, such as grandparents, contribute?
⦁ What investment options are available, and is the recommended timeline for these options consistent with your child’s educational needs?
⦁ What can the savings be used for? For example, can you use the funds for primary school, high school and/or university fees? What about uniforms, laptops and school trips?
⦁ What happens if your situation changes and you can no longer contribute to the fund – will you lose your investments? Are there any penalties? How difficult is it to withdraw funds if the child’s priorities change? For example, what happens if your child doesn’t want to pursue higher education?
Talk to your children about money. Teach them what you learn.
When they are old enough, proudly show them that you have been saving a small amount for a long time. You will then pass on the knowledge of just how powerful long-term savings can be and teach them one of the most important lessons in life, but so often overlooked.
Be conscious of money. Be conscious of what you teach your child. Successful money management isn’t taught in schools (or many homes), it should be, but isn’t.
Disclaimer: This information provided is general in nature. It is based on the knowledge and experiences of the author and not intended to be taken as financial advice. It does not take into account the objectives, financial situation or needs of you or any other particular person. You need to consider your financial situation and needs before making any decisions based on the information. You may have to modify the information and do further research, for it to suit your personal financial situation. Therefore, before acting on the information, it is recommended that you consider its appropriateness to your circumstances or consult a financial adviser, tax advisers or legal professional to assist you in doing this.