Saving for your child’s education in a world of rising tuition costs

Mandy Porter, Alexander Forbes senior financial planner

Education inflation runs at 4-5% above headline inflation, meaning South African households have to make more room in their budgets each year to pay for rising tuition fees. And with former Model C schools costing from R30 000 a year up to R130 000 a year for a private school, not including extras like stationery and extra murals, sports kits, birthday presents for parties and after care, the bills start to add, says Mandy Porter, Alexander Forbes Financial Planning Consultants senior financial planner.

 “In an ideal world you will start saving for your as yet unborn child from your very first pay cheque, even if at this stage you haven’t actually earmarked that money for that specific purpose. Then you can start ring fencing buckets as the years pass, for emergencies, retirement or your child’s education. Have discipline to save from the outset so that it becomes a habit,” Porter said. “A savings culture starts with thinking and planning ahead. Have a holistic view of your cash flow and savings as well as a monthly budget which you stick to. Make sure to use the power of compounding growth over time.” Save a portion of your annual bonus towards your child’s education, or consider paying your child’s school fees upfront at the start of the year to take advantage of the discount offered.

Porter suggests the following savings vehicles to use to save for your child’s education:

Tax-free savings account

This is a great way to make a start with a simple debit order every month into an account which could be market-related or linked to an interest-bearing product.” You can contribute up to R33 000 per year, either as a lump sum or monthly with a maximum of R500 000 over a lifetime. If you contribute more than the yearly limit, the excess contribution will be taxed. “There is no tax on interest, dividends or capital gains earned within the account and you can withdraw at any stage.”

Endowment

Porter recommends this for parents in a higher tax bracket, for anyone paying more than 30% marginal tax. “This investment has a minimum five-year term. Once this term is over, you can take money out when you need to.”

Unit trusts

The tax you pay on this investment will depend on your tax bracket. If you are in the top tax bracket then interest is taxed at your marginal tax rate, at a maximum of 45%. “However, South Africans are allowed an annual interest exemption on the first R23 800 of interest earned per year and the first R40 000 per year earned in capital gains is also excluded from tax. Take these exemptions into account in your calculations for an endowment versus a unit trust as a savings vehicle.”

The financial decisions you make now will determine both your own as well as your child’s future financial well-being, she said. “You won’t get there overnight but start by consulting a financial adviser to get a plan in place.”



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