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.
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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.