Saving for education is vital because education plays an increasing role in the personal development of your children.
When saving for their education consider the following:
- The term left until your child starts their secondary or tertiary education.
- The earlier you start saving, the more likely you are to achieve your investment goals.
- Make it a family event and ask family to contribute to the fund you have created.
Different investment vehicles
There are many different investment vehicles you can use to save for your child’s education.
Tax free savings account
You are able to save up to R 36 000 p.a. per taxpayer into a tax-free savings account. All future growth of this fund will be free of tax. The only negative when choosing a tax-free savings account, is that should you withdraw funds from this account you are unable to replace the capital to continue growing it tax-free.
Endowment
An endowment is a long-term investment, and you can only withdraw from this account after a period of five years. If you need funds sooner, you will pay penalties to withdraw from it. Endowments are often marketed as tax free investments, but the investment is only paid to you after a 30% tax rate. If your marginal tax rate is lower than 30% it might be advisable to use an alternate investment vehicle.
Unit Trust Investment Account
Unit trust accounts give you exposure to the market by allowing you access to shares and other asset classes. When you consider this investment vehicle you need to have a long-term vision.
Other important points to take note of:
Inflation decreases the purchasing power of money. When you save or invest in an investment that does not give you a return greater than inflation, you will be able to buy less with your money. Education inflation is higher than the official Consumer Price Index (CPI).
When planning for your children’s education, you need to take the following aspects into account:
- When do you want your investment to start assisting you with high school or university fees?
- How long will your children be at university for, 3 or 4 years? Do you only want to plan for one field of study?
- You need to provide for their books and other instruments they might need for their studies.
- At which university will your child study and will they need funds for accommodation?
- If your child will become a full time student he/she will need to receive some form of allowance for food and other necessities.
Before committing to any investment plan, consult with a CFP® professional to ensure that your plan will be sufficient for your children’s educational needs.