Home Saving What Is The Best Way To Save For Your Child’s Education?

What Is The Best Way To Save For Your Child’s Education?

written by Shelley Marsh 30/01/2014
Save For Child's Education

Education is expensive.  Even if you have no intention of sending your child to a private school, the costs associated with your local public school soon add up.  There are books, shoes, uniforms, excursions and after school activities.  The costs seem endless.   This is not even to start thinking about costs of higher education should they choose to go on to university or TAFE and you want to help them out.  So how do you afford to pay for it all?

The keys to success to save for your child’s education is to start as early as you can and save regularly.  Time and having a regular savings plan help to harness the most powerful wealth building tool ever: compound interest.  Compound interest is when you earn interest on top of your interest.  When you save or invest your money earns interest, so you then earn interest on your original investment amount and also on the interest you have already earned.  This makes your money work for you and helps to turn a little bit of money into a lot over time.

Next you need to set your goal.  Figure out how much you would like to save and how much time you have to do it in.  From there you break it down into a much smaller weekly, fortnightly or monthly savings goal.  So maybe your savings goal is $10 per week, so you have $1040 dollars to deal with extra expenses when you child goes to school in 2016.  Breaking a large goal into a small regular goal makes turns something large and daunting into something far more manageable.

To supercharge your savings think about adding any windfalls you might receive to your education fund, for example tax refunds.  Or you could look into charitable schemes such as Saver Plus, which matches your savings for your or your child’s education.  You need a healthcare card and a regular income.  Click here to find out if you meet the criteria.

It also pays to be aware of whose name you put the investment in.  Prohibitive tax rates can apply to investments in your child’s name in certain circumstances, so it pays to think about it.  Click here to find out more.

Once you have saved the money, there is no ‘one size fits all’ answer to how you invest it.  The answer is different for each individual family but here are some of the options:

(1)    Pay down your home loan and redraw

Using this strategy you make extra repayments on your mortgage or offset account then withdraw the money when it is time to pay for the costs.  Most people on variable mortgage rates are paying about 5.5% per year, so the money put into the mortgage is earning a effective tax free return of 5.5%, without taking any risk. The key with this one is it takes discipline as the money saved is part of a broader pool, so you have to make sure you don’t spend it on anything else.   To read more about this strategy please click here.

(2)    Invest in cash

This strategy doesn’t always give you the highest return but it relatively risk free.  Find an online fee free account with a high interest rate and direct debit in your regular savings amount.  Have the direct debit come straight out of your pay so you ‘pay yourself first’ and watch the savings build.  If you are anything like me, make sure the account has limited access so that temptation is minimized J  Watch out for ‘bonus rates’, where an account has a high rate of interest for 3 or 6 months then reverts to a low rate.  There is nothing wrong with taking advantage of these rates and then moving if there is a better offer.  Also watch out for term deposits that are paying good rates if you are happy to lock away your savings for a while.  The problem with this strategy right now is that interest rates are low, so returns are not very good, and with inflation starting to rise your return after accounting for inflation (rising prices)  is not very good.  Click here to get some extra tips on how to get the best savings account.

(3)    Invest in higher risk assets such as property or shares.

The advantage of investing your child’s education savings in these types of investments is that they generally have higher returns over time than just investing in cash.  The disadvantage of investing in these types of investments is that they are higher risk.  This means the return you might get in any one year might vary dramatically, from big gains to big losses, but over time you should make more money than cash.  I will be writing a post with more detail on the pros and cons of on investing in shares in the coming weeks.

(4)     Investment bonds

An investment bond is a tax structure through which investments are held.  They can be started with as little as $1000 and allow you to invest small amounts regularly into Australian and International shares.  They have several tax advantages, only 30% tax is paid on earnings (useful if you are in the highest tax paying bracket) and the capital gains are tax free if they are held for longer than 10 years and the proceeds are used for educational purposes.  They are offered by life insurers and friendly societies, and investors can choose from a range of underlying investment options ie. mixes of cash, bonds, shares etc.

(5)    Education funds

Education funds are special funds to help you save for your kid’s education.  There are some tax benefits around this type of investment but there are also plenty of rules, so be wary and make sure you read all the fine print.  For example what happens to your investment should your child choose not to go to university?  Or your circumstances change?  Also, quite often fees on this type of investment are quite high, so make sure you compare it to all your other options and be very clear on all the fine print so you don’t get caught out.

Educating your child is a big responsibility.  The two keys to success are to start early and save regularly.  There are many different options for investing the money.  Which is right for you depends on many factors so make sure you get proper financial advice and read all the fine print before you decide.

If you liked this you might also like:

How To Create A Budget

5 Financial Tips You Need To Know Now You’re A Parent

How To Pay Off Your Mortgage Faster

3 Things You Need To Know When Saving And Investing For Your Child

How I Saved On My Electricity Bill

Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial advisor for advice specific to your individual circumstances.

 

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21 comments

Alison Parks 30/01/2014 at 9:04 pm

Thanks Shel, great tips! We use the ‘cash only’ option at the moment, but am certainly interested in looking at your other suggestions. Cheers, Alison p.s. the Saver Plus link isn’t there

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Shelley Marsh 02/02/2014 at 8:23 am

Thanks Alison – you are the best – the link is fixed!

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Maxabella 30/01/2014 at 10:54 pm

It is so expensive, especially when you factor in extra-curricular activities. I love giving the kids grand opportunities like band, dance and gymnastics, but it comes at a hefty price. Thanks for all your good advice, Shelley. x

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Shelley Marsh 02/02/2014 at 8:24 am

Yes I agree Bron – those extra activities do add up!

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Renee Wilson 31/01/2014 at 7:40 am

This is excellent advice thanks Shelley. I have been thinking about this a lot lately. Before long our kids will be starting school and I want to have at least a little money saved up. We’ve started putting $10 a week away for each girl, but it would be great to do something even bigger. Thanks.

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Shelley Marsh 02/02/2014 at 8:25 am

Hi Renee! Yes the time skips by pretty quick – doesn’t it?

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Caroline Raj 31/01/2014 at 10:09 am

Education is so expensive and between childcare and then education I often feel never get back on top again. These tips are really useful and will help a great discussion with my husband tonight!

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Shelley Marsh 02/02/2014 at 8:25 am

Thanks Caroline – we are looking forward to the end of our childcare costs too! Only 2 more years 🙂

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Lauren @ Create Bake Make 31/01/2014 at 2:51 pm

Thank you for sharing your tips, this is really timely advice for us. We are in the process of switching from one of the education funds over to a managed fund after comparing the fees/returns etc and also the ‘what if’ if our boys don’t go on to further education.

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Shelley Marsh 02/02/2014 at 8:26 am

Hi Lauren, Yes that is definitely a good strategy.

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Grace 31/01/2014 at 9:40 pm

Love how you come up with so much great advice and suggestions, Shelley! I guess we’re going to have to start thinking about an account. My MIL has opened one for each of the twinions and we put away some in there. But I hadn’t thought of an actual education fund. Something I’ll have to look into!

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Emily @ Have A Laugh On Me 01/02/2014 at 9:54 am

It’s a hard one, we’ve been putting aside $10 a week for every child since they were born, we joke they are richer than us, but we don’t miss the money and will be handy for whatever down the track! x

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Shelley Marsh 02/02/2014 at 8:27 am

Absolutely Emily 🙂

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Lucy @ Bake Play Smile 01/02/2014 at 5:33 pm

Shelley I seriously love your blog! You have such wonderful advice and I always love reading your posts! Love your down to earth approach!! Definitely one of my favourite blogs 🙂

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Shelley Marsh 02/02/2014 at 8:27 am

Thank you Lucy – that is very nice of you to say so! I am a huge fan of Bake Play Smile too.

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Mums Take Five 02/02/2014 at 8:13 pm

Wow Shell, So many options and ideas. I’m hoping mine will all get fully funded scholarships but i guess a back up plan is also a good idea 😉
Thanks for linking in at “Sunday Brunch @ Mums” xx

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Emma Fahy Davis 02/02/2014 at 9:11 pm

With five to think about, I must admit the cost of university terrifies me!

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Sonia @ Natural New Age Mum 04/02/2014 at 1:18 pm

I think I have found the jackpot in your website. I really need to do more planning with money!! Thanks Shelley!

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Seana Smith 06/02/2014 at 8:31 pm

Really good advice… the idea of putting savings into the mortgage hadn’t struck me before at all but it really does make great sense when interest rates are so low at the bank.

I think it’s also good to think long and hard about whether to go private or public as private is SO much more, uniforms and extra costs are also much bigger than in the public system.

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Rebecca Stephens 08/02/2014 at 8:36 pm

Thanks for this. My boys are 3 and 1 and saving for their highschool education already freaks me out. I did set up savings accounts each of them when they were six months old and it’s amazing how much $10 a week adds up to! I also add in windfalls, eg. I put in my maternity immunisation allowance for my first son (by the time Son #2 was born it had been scrapped!). I’m just hoping we win the lottery so we can send them to private schools:-)

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Bec @ The Plumbette 05/04/2014 at 7:26 pm

Well at the moment I put $5 in each girls account because while we are living on one wage, that’s all we can afford and I honestly can’t believe how it adds up. These savings accounts are to be put towards cars or weddings.
In relation to education, my grandpa set up a managed investment fund and we add money to this monthly and I’m hoping that the compound interest will do it’s thing and we will have enough to educate our children. Great post Shelley. You always offer great advice. 🙂

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