Two children, six years apart: how much and where do I save for their education?
Given the short timeline for the older child, it would not be advisable to take an aggressive approach by investing in equities
Q: I have two schoolgoing children, one in grade 10 and the other in grade 4. I feel I may have left it too late, but desperately need to put money away for their education. How much do I need to save and what are the savings options? At the moment I only have R1,000 to spare a month but considering that university is just around the corner for my eldest, I feel this may not be enough. Can you please advise? — Lieb Ohlson, via e-mail.
A: Devon Card, Certified Financial Planner® and director at Crue Invest, says:
It is great that you are planning ahead for your children’s tertiary education. As your two children are quite far apart in ages (we have assumed 16 and 10 respectively), your investment approach for each child would be somewhat different. In preparing this advice, we have assumed that you would want to fund a four-year undergraduate degree-diploma for each child at a cost of R60,000 per year. We have further assumed that you are currently paying R2,000 per child per month in school fees. Bearing this in mind, we would advise as follows:
Your older child (grade 10)
We have assumed that, as your child is in grade 10, you would have a further 30 months to fund her tertiary education. What is important is that you are already contributing monthly towards her secondary education, so it would only be the shortfall between the cost of tertiary education and what you are already paying in school fees that you would need to fund. So, if you are currently paying school fees of R24,000 a year, you would need an additional R36,000 for her first year at university.
Given the relatively short timeline of 30 months, it would not be advisable to take an aggressive approach by investing in equities, as the short-term volatility may affect your capital detrimentally. A money-market fund would be a safer option to save towards your older child’s tertiary education.
A tax-free savings account (TFSA) is also a good vehicle for education savings as you will not pay tax on any growth in, nor on any withdrawals from, the fund. Further, as you are able to contribute R33,000 per year towards a TFSA, you would be well below the allowable threshold. We recommend opening a TFSA in your own name so as to not detract from your child’s lifetime limit of R500,000.
To fund your older child’s education, you would need a lump sum in today’s terms of R182,000 to fund the shortfall in her university fees. To achieve this, you would need to invest R6,066 per month over the next 30 months.
Your younger child (grade 4)
You are fortunate in that you have eight and a half years in which to invest for your younger child’s tertiary education. Given this horizon, you are able to invest more aggressively (that is, in equities). Our advice is therefore to contribute towards a separate TFSA held in your name. At the same time, we recommend that you invest monthly towards a unit trust portfolio, which targets annual returns of inflation plus 4%.
For your younger child’s tertiary education, you would need a lump sum in today’s terms of R250,000 when she reaches the end of matric. To achieve this, you would need to invest R1,300 per month into a strategy that targets annual returns of 10%, net of fees.
Given the above, it is evident that saving R1,000 per month towards their tertiary education will not be enough. In this regard, you may want to consider:
• Applying for student loans to supplement the costs of their tertiary education.
• For each child, we have budgeted R60,000 per year for four years. Depending on the institution and course they pursue, the costs may be significantly lower than this.
• Your children could assist by doing part-time work while they are studying.
• There may be expenses you are paying for now that will fall away later on. For instance, you may have paid off your home loan by the time your younger child finishes matric, in which case you could channel the additional funds towards her education.