Introduction:
The costs of raising children from birth until adulthood are frequently reported by the media and vary widely depending on whether you want your children to go to public or private schools and whether they plan to go to university or college.
Education Costs:
For example, if you send two children to a private high school that costs an average of $20,000 a year for each child, you will have spent $240,000 on school fees by the time they both graduate. And that’s not counting extras such as school uniforms, trips, and sporting clinics. Public schools are much cheaper, but there are still extra tuition fees, textbooks, uniforms, and school camps to pay for.
The cost of going to university or college can also vary. If your child is eligible for HECS-HELP (a government loan available to tertiary students), they can choose to defer payment of university fees. Even if they don’t pay fees upfront, your child will have to pay for books and materials, union and sports fees, and transport costs.
Start Saving Early:
The earlier you start saving for your children’s education, the better. Education costs are usually a long-term goal that can take more than five years to achieve.
Key Steps to Set Up a Savings Plan:
- Set a Savings Goal: Decide what is being saved for (e.g., education – the type of education and at what level, private schooling and/or tertiary education?).
- Set a Budget: Determine how much needs to be saved to reach the required goal.
- Choose an Investment Option: Decide which product or where the money should be invested.
- Determine Ownership: Decide in whose name the investment should be made.
Investment Options:
To help you reach your goal, you could put your savings into:
- Direct investments such as shares
- Managed funds or insurance bonds
- Term deposits or savings accounts
- Education funds
Starting your savings plan sooner makes it easier to keep your savings growing, reducing the risk that you may have to fund any shortfall when the school fees are due. This is due to the benefits of compounding interest.
Understanding Compound Interest:
Compound interest is like a layer cake for your savings. You earn interest on the money you deposit and on the interest you have already earned – so you earn interest on interest.
Example:
An example of an account that earns compound interest is an online savings account that pays monthly interest. If you invested $10,000 at 5%, you would earn $2,834 in compound interest after five years, giving you a total of $12,834. This is because every month, the interest is added to your account, and you’ll earn interest on the interest.
Compound Interest on a $10,000 Investment at 5% per Year (Compounding Monthly):
| Year | Initial Deposit | Interest | Total |
|---|---|---|---|
| 1 | $10,000 | $512 | $10,512 |
| 2 | $0 | $538 | $11,049 |
| 3 | $0 | $565 | $11,615 |
| 4 | $0 | $594 | $12,209 |
| 5 | $0 | $625 | $12,834 |
Consider Other Financial Obligations:
Before you decide to put your money into any saving options, you should consider your other financial obligations. For example, you may be better off repaying your non-deductible debt, such as the mortgage or car loan first, before you start saving.
Seek Professional Advice:
Your financial planner can assist you with all of these decisions, ensuring that the future of your child’s education is off to a great start.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
