Education is the basis of a child’s future. However, a good education comes at a price. It may be difficult for parents to save for their children’s education — especially when they are trying to save for retirement at the same time, with a lot of financial responsibilities to meet. But starting early enough can ease the pain. The reason for this is quite simple — the earlier you start, the less money you need to set aside every month.
Tumi believes that her involvement as a parent will not stop at merely checking her daughter’s homework, but doing the best that she can in setting her child up for her future. She will achieve this by sending her daughter to a good school and making provision for her tertiary education. Therefore Tumi should ensure that she will be able to cover the costs of her daughter’s education.
She is happy to send her daughter to the local government primary school, but has to make up her mind on saving for her daughter’s high school and tertiary education.
So Tumi needs to ask herself the following questions:
- How many years left until my child starts high school? Will we send her to a public, private or a former Model C school?
- What is the estimated cost of school fees and what will the additional costs be?
- How many years left until she will be going to university?
- What are the estimated costs of a university education?
Tumi and her husband decide that in 12 years’ time they want to send their daughter to a former Model C high school, the fees of which are currently between R7 000 and R10 000 per year.
School fees of R10 000 now are likely to escalate to an amount of R31 385 in 2019 if they increase on average by 10% per year. This means that Tumi should start saving R585 a month to provide for her daughter’s high school education, if her investment grows at 10% per year.
In December, Tumi cleared her credit card debt — on which she paid back R500 a month — using her annual bonus. She now has that R500 available to save for her child’s high school education.
She can also cut back on dining out regularly and have R85 available to add to these savings every month.
However, she and her husband want to give their daughter a tertiary education too.
According to research from Sanlam, the tuition fees for a three-year BCom degree are about R46 390. If Tumi and her husband make provision for tuition fees of R50 000 a year, this amount will grow to R252 700 a year in 17 years’ time, assuming an escalation rate of 10%. This means they need to save approximately R1Â 500 a month.
Tumi and her husband agree that he will save the R1 500 a month to provide for the tertiary education, while Tumi will save the R585 a month for their daughter’s high school education.
There are several ways Tumi and her husband can save this money — for example, through regular monthly deposits via debit order, in a variety of collective investment instruments ranging from money market funds to equity funds, or a contractual savings product from a professional financial institution. There are also policies available that focus specifically on saving for a child’s education. Some of them have a premium waver benefit at the death or disability of the parent, which protects the child. Ideally, planning and implementing these investments should be undertaken in consultation with a certified financial adviser.
Regardless of the route Tumi decides to follow, when it comes to saving for her child’s future the message is quite simple: the sooner she starts, the smaller the monthly amounts she needs to invest to achieve the same target amount.
In South Africa, there is a growing demand for independent education. This could cost anything between R20 000 and R90 000 a year, depending on the particular school’s fees.
An average fee of R50 000 a year, excluding additional costs such as extramural activities and uniforms and escalating at a rate of about 10% a year, will be approximately R157 000 a year in 12 years’ time.
Therefore you need to invest R2 926 a month to save for your baby’s five years of private high school education, starting in 2019.
Next month Tumi gets a salary increase. It is a good opportunity for her to review her retirement savings
Tumi’s financial situation update
Tumi earns R11 200 a month
October 2006
R5 000 of credit card debt costing R500 a month
R5 000 of store card debt costs R416 a month
Cellphone R600
Groceries R1 000
Household bills R500
Entertainment R1 000
Clothes R1 000
Crèche R1 000
Petrol R1 000
Total debt repayments including R3 000 mortage loan and R2 000 vehicle finance came to R6 000.
Tumi spent R900 more than she earned, with no savings.
February 2007
Credit card debt paid off.
Store card debt reduced to R2 346 due to additional R170 payment a month. Will be card debt-free by June.
Cellphone R330
Groceries R1 000
Household bills R500
Entertainment R500 (only eats out once a week)
Clothes R500 (has limited shoe purchases)
Crèche R1 000
Petrol R1 000
Total debt repayment: R5 580
Tumi now spends R10 410, giving her R790 to save. She invests R585 towards her daugther’s education and R150 towards life cover. This gives her R50 towards an emergency fund.