Education savings plan for your child – Start as soon as you can
I have been asked this question many times – How much should I save for my child’s tertiary education. All of us would love to be able to provide our kids with a tertiary education savings plan, but the reality is it is not always affordable. In the few lucky cases, your child would be eligible for a study bursary of some kind but in most cases, you end up going the route of a study loan.
That is why I want to talk about the need to start your child’s education savings plan as early as possible. For this article I will only focus on saving for university to illustrate my point.
Based on a 2019 study performed by Old Mutual, the average cost per annum for is R64 200. Now, this figure will vary based on the type of degree that your child will be studying but for illustrative purposes I will be working on the average cost.
The worrying trend is that the increase in these fees per annum does not follow the trend of your normal inflation rate. The current industry average being used for education inflation is 9%. The point is most salaries increase marginally every year, if at all, but the cost of education keeps skyrocketing.
If we stick to the trend of a 9% increase in university fees, then the figure for 2020 goes up to R69, 978.
I want to work with this figure and showcase three types of scenarios:
Current age of child:
I will be using the following assumptions for both scenarios:
Level of education: Tertiary (University, not Technikon).
– Education term: 4 Years
– Annual cost: R69 978
– Education inflation: 9%
– Inflation: 5%
– Annual contribution increase: 5%
– Client tax rate: 30%
– Targeted investment return: Inflation Plus 2-3%
– Investment vehicle: Linked Investment
– Contributions to continue during tertiary education
Let’s have a look at the results:
Scenario 1: Newborn
Based on the above assumptions, the estimated future value needed to support your child’s university education is R1 645 426.32. To reach that target with the assumptions used, that equals a monthly savings of R2 541.35.
Scenario 2: 10 Years old
Based on the above assumptions, the estimated future value needed to support your child’s university education is R695 045.86. To reach that target with the assumptions used, that equals a monthly savings of R3 292.38.
Scenario 3: 15 Years old
Based on the above assumptions, the estimated future value needed to support your child’s university education is R451 732.12. To reach that target with the assumptions used, that equals a monthly savings of R4 995.05.
You might be saying these figures are quite ridiculous and unaffordable. The point that I am trying to show is start saving as much as you can as soon as you can, even if it is not the amounts illustrated above. By saving what you can afford, you can reduce the financial obligation that will be needed once you send your child to university.
Please note that these figures are simply for illustrative purposes as each client’s circumstances will be different.