Educational savings plan tips

As a hard-working parent, you naturally want to ensure you have a savings plan for education for your children. As Nelson Mandela famously said: "Education is the most powerful weapon which you can use to change the world."

But the realities of today’s economic climate make it tough to save, particularly when it comes to education needs. Growing pressure on household incomes and the spiralling costs of school and university are major concerns for many families.

Fortunately, there are several ways you can save money for your children’s education.

Setting Up a Savings Plan for Education

This guide will help you start your child’s saving plan for education:

1. Why is  it important to save for education?
2. How much do you need to save for education?
3. What are your options for saving for education?

1. Why is it important to save for education?

According to FIN24, between 2010 and 2015 the cost of education rose by around 50% in South Africa. Looking at the pace of ‘education inflation’, for a child born in 2017, their final year of schooling might cost around R600 000 on average at a private high school.

Independent financial advisor, David Kop, says that South Africans should start thinking more holistically about saving for their children’s future education:

"We need to be flexible in planning for our children’s future education, because their needs may change as they grow up. They may, for instance, decide in their teens that they don’t want to go to university in South Africa. It’s also about your lifestyle choices. We chose to have children and we need to make provision for that. Do you really need a 4x4 if you’re not a game ranger driving in the veld every day?"

Every little bit of saving helps

While there’s nothing wrong with grandparents, uncles, aunts and godparents showering your child with affection in the form of money or gifts, why not encourage them to rather contribute to your child’s future education needs? Suggest that the best gift they can offer is a contribution to their education fund.

Start as soon as you can

Don’t be overwhelmed by the costs of sending your child to school or a tertiary institution; instead, start saving as early as possible. The sooner you do, the more compound interest you will earn, and the better your long-term gains will be.

2. How much do you need to save for education?

Education inflation is higher than South Africa’s Consumer Price Index (CPI) and this gap has widened from around 2% since the early 2000s.

According to a report by Old Mutual, below is the average expected cost of educating a child for 1 year:

Cost of education in SA by 2025

• Public Primary or High School: R63 300
• Private Primary School: R154 900
• Private High School: R248 700
• University: R107 600

Cost of education in SA by 2035

• Public Primary or High School: R149 800
• Private Primary School: R366 700
• Private High School: R588 800
• University: R254 700

3. What are your options for saving for education?

Whatever your children dream of becoming – a rocket scientist, an educator, a programmer, a physician, a writer – you can help them get there if you start to save money early enough.

Financial planning experts say that whatever savings or investment plans you opt for, it’s most important that you create a debit order so that you remain a regular and diligent saver.

Here are three ways you can save money for your child’s future:

1. Savings accounts

While keeping some cash in the bank in a savings account is good, it’s not recommended as the ideal way to save for your child’s education. A standard savings account won’t attract the level of interest that a good investment plan could offer. Some savings accounts offer tiered interest rates, so the more you invest or keep in the account, the higher the rate. Speak to your financial advisor about the best options.

2. Tax-free savings accounts

A Tax-Free Savings account is a smart option. Deposit any amount up to R36 000 per year (single or multiple deposits), and you will not be taxed on the amount, so any money you save will grow at a relatively faster rate compared to regular savings accounts. Start saving as early as possible and keep within the annual threshold amount, and the lifetime limit of R500 000.

You can open a tax-free account for your child as soon as they have an ID number. Any money you save in that account becomes technically and legally your child’s money. When they turn 18, they may decide to spend it on a trip abroad rather than use it to fund their tertiary education – so communicating the importance of a good education to your child from an early age is important.

3. Medium- and long-term investments

To beat education inflation, investing in a solution that outperforms CPI is ideal. There are several investment plans available, but remember to consider the fees associated with your investment. Financial planning experts say that starting to save from the time your child starts Grade 1, will enable you to invest more aggressively and ride-out market fluctuations. Unit trusts can provide ideal vehicles to use as part of an education savings plan, depending on your savings behaviour and requirements. Unit trusts also offer flexibility if you require early access to your money.