Laura du Preez | 02 March 2022
Laura du Preez has been writing about personal finance topics for more than 20 years, including eight years as personal finance editor for two leading media houses.
Whether you are planning a family, just started a family or your offspring are growing up, the escalating cost of educating your children is something for which you should plan.
The biggest problem parents face is that the cost of education is growing at a higher rate than the average earner’s income – typically by around three percentage points above the inflation rate, according to Hester van der Merwe, an independent financial planner at Ultima Financial Planners.
Saleem Sonday, head of group savings and investments at Allan Gray, says over time this difference effectively means that a greater portion of your salary will have to be set aside for your children’s education.
“Last year many private schools either froze fees or implemented very moderate increases,” Sonday says. “But this year most schools have raised their fees by 5% and this is expected to accelerate over time.”
The way to tackle this is to use the returns you earn on an investment to lower the impact of education costs, Sonday says.
Just start
The additional costs of a new baby, and school fees for established families, can stretch your budget. Saving just a small amount, however, will help make your future costs manageable.
Starting when a child is born – or even before – will have the greatest impact.
“Many parents underestimate the costs, and are shocked when the fees are due,” says independent financial planner Gugu Sidaki, director and wealth manager at Wealth Creed, an independent financial advisory practice.
It is difficult to make an impact if you only start saving when the fees are due, she says.
Van Merwe says growth in your investment capital does not happen overnight and you need time for your investment to work through the market cycles and absorb short-term ups or downs (volatility), she says. Read more: Why is compounding growth so important?
Sonday says longer-term savings can have a higher exposure to shares listed on a stock exchange like the JSE – this should deliver higher returns and the investment risk will be mitigated by a longer time horizon. Read more: What do I need to know about investment risk and time?
If you start saving later, you will need to invest more conservatively and are likely to earn lower returns, he says.
Even if you are not sure if you will have children – or if they will need a costly education – your savings will never be wasted.
You can use those savings to start a business or to travel, Sidaki says.
It is never too late
Don’t ever think it is too late to start saving – it is just trickier if you start late, Sidaki says.
“You either have to commit more to your savings – or you need make adjustments and consider other alternatives,” she says.
Van der Merwe warns against making conservative assumptions about your future education costs, as fees have increased drastically over the last few years.
Both financial planners caution parents not to forget other expenses such as school uniforms, extra-mural activities and stationery.
Sidaki says additional costs can add 30% to 40% to school fees.
Consider your options carefully
Sidaki and Sonday also advise parents to think carefully about their options – the range of institutions and the results they produce.
The choice you make is very personal, but sending your children to the most expensive schools can put unintended pressure on you as a parent, Sonday says.
“The private education costs are astronomical, and many parents do not take inflation into account,” Sidaki says.
Even sending your child to a top public high school is not cheap, and you can expect to pay around R55 000 a year for a mid-range former model C government high school in Cape Town, he says.
That may not be as crippling as a private school, but it is still beyond the means of many middle-class South Africans, Sonday says, suggesting parents consider online learning.
Not at your expense
A good education is a gift to your child, but it should not be at your expense, Sidaki says. You must continue your own savings for retirement.
“You have to operate like no one is going to save you – don’t ever bank on that education saving you later – so much can go wrong with that plan,” she says.
If you have to borrow to fund education costs, it should be your “last resort”, Sonday says. Be sure you understand the debt you take on, and can afford to repay it, he says.
Tax free savings or not?
You can give your education savings a significant boost by using a tax free savings account, Sonday says.
However, remember the life time limit on contributions (R500 000) and that you cannot replace the money you withdraw from these accounts. Read more: What do I need to know about investing in a tax-free savings account?
Van der Merwe says a tax-free savings account’s magic only starts to happen after a long time – especially if you can contribute the lifetime amount over time and enjoy no tax on interest, dividends, and capital growth for many years, she says.
Depending on your circumstances, you may be better off using this account for longer-term savings and not for a shorter-term goal such as a child’s education.
