Mandy Collins
Ensuring that your children will have the best possible education is no longer a simple matter. While many state schools continue to provide an excellent grounding, it cannot be guaranteed that one of these schools will be near you. Nor is financial preparation for such contingencies necessarily a simple matter. A little hard study of the options will go a long way.
In the past, if parents were putting away money for their children’s education, they were thinking in terms of tertiary education. These days, however, parents have to fork out far more for primary and secondary school, which means the saving has to start much earlier, and cover a much larger relative cost.
Of course, the insurance industry has risen to the challenge, and there is a plethora of education schemes available, beautifully packaged and seemingly perfect for your requirements. Or at least, that’s the way it seemed when your broker presented it to you last night.
However, an increasing number of financial fundis are warning consumers against these products, pointing out that they have more pitfalls than perks.
Iona Minton, communications director of the Financial Fitness College in Sandton, explains: ”Most of the policies offered by the insurance companies come in the form of an endowment with a choice of maturity dates. Although an endowment is a forced contractual savings plan, the returns have been very low in the past 10 years, with many of them not even keeping up with inflation. Add those bad returns to the high upfront costs, and you have a very poor option. Your broker ends up earning 16% to 85% of the first year’s premium, as well as a percentage of the second year’s premium, which means a five-year endowment yields very little.
”Other disadvantages include the management and administration fees added to the endowment, as well as a life-cover fee, which does not attract capital. And in fact, some of these policies have performed so badly that clients have lost money on them. There really is very little to recommend them.”
So what are the alternatives? Firstly, Minton recommends that we get into the habit of saving, period.
”South Africans simply do not save,” she points out. ”On average they put less than 4% of their salaries away for a rainy day. And if you really want to save for your children’s education, you have to start before they are born. It’s worth starting when you decide that you would like to have children in the future.”
Minton points out that you need to save in a way that allows you to have the money ready when the child starts school – not when the schooling has already been completed. This is the way some of the education policies are structured, which makes no sense at all.
”A better way to save is to invest in unit trusts,” she says. ”They generally perform above inflation, and the upfront costs are relatively low. Also, you can follow their progress in the financial newspapers to see how your investment is doing. The money is also easily accessible if you need it, and you can sell units when you need money to pay education expenses. But do bear in mind that unit trusts are long-term investments. So in order to see any kind of return on your money, you need to leave it there for a minimum of three to five years – which again points to getting a head start on saving for your child’s education.”
Minton advises against using an ordinary bank savings account because the interest you receive is so low. She also recommends using resources like grandparents.
”If your parents want to know what they can buy for their grandchild, ask them to invest that money for his or her education,” she suggests. ”That can be a wonderful resource.”
But the best way to save, she says, is by investing in blue chip stocks at the Johannesburg Stock Exchange (JSE). ”Many people are scared of investing in the stock market, but it has a track record of excellent growth,” Minton points out. ”Over the last two decades, it has risen by an average of more than 20% per annum.
”If you are nervous about the stock market, then take the time to learn about it – the JSE runs a basic course through Progressive Systems College, and we have a course at the Financial Fitness College too. So you can learn to invest at the JSE with some confidence if you take the trouble to find out how it works.”
Minton says you can start investing in the stock market with as little as R200, but recommends you rather save till you have about R5 000, so as not to limit your choice of shares. She cautions, however, that while investing in the stock market can be lucrative, it is important to know that there is more associated risk.
”However, if you have taken the time to learn about the market, the risks will diminish. If you take a systematic approach, the rewards can be enormous.”