The start of the 2020 school year may be a source of much anxiety for you, especially when it comes to the affordability of school fees, books, stationery and uniforms. Avoid these critical mistakes if you’re saving for your child’s education.
As parents, we all want the best for our children, and this often includes being able to give them the best education we can afford. “In the journey to saving for your children’s education, it is often the small adjustments you make along the way that can mean the difference between having enough, or falling short, when the time comes to pay for education,” says Saleem Sonday, head of Group Savings at Allan Gray. He says the first step in avoiding critical mistakes in the journey to saving for your children’s education, is shifting your mindset.
“Sometimes, the thought of saving for education is so daunting that it leads you to make avoidable investment mistakes or not making any investment decisions at all,” says Saleem. “Shifting your mindset away from saving to match the total cost of education or not saving at all, to saving as much as possible, is the first step towards alleviating the impact education fees will have on your future salary. Understand that the more you save, the more freedom you have to choose from a wider variety of school options or to lessen the burden on your budget.”
These are the top 4 mistakes Saleem believes parents make when saving for their children’s education:
Not doing your research
Saving without having researched the various investment products available to you could cost you money in the long term.
“There are many investment accounts and policies you can use to save for your child’s education. It is important to research the various options available, comparing costs, restrictions, expected returns and other product features and benefits,” says Saleem. Make sure you choose a product that suits your needs to avoid unwanted fees or tax implications.
A few examples of products that are typically used for saving for education include education policies with insurers, endowments, tax-free savings accounts and unit trusts. Each product comes with its own pros and cons. The one you choose will depend entirely on your own needs, personal circumstances and investment goals. Speak to a financial adviser to help you if you are uncertain as to which product would be right for you.
Dipping into your child’s education savings
Life doesn’t always go as planned, which means you may be tempted to dip into your child’s education savings if the opportunity presents. You may think it will be easy to ‘catch up’ at a later stage with additional contributions. But, doing this means you will miss out on the full power of compound interest.
“Time is an essential ingredient to successful investing. The sooner you start, the more time you have to make contributions and to benefit from the magic of compounding: earning returns today on the returns you earned yesterday.”
Not budgeting for the long term
According to Statistics South Africa, education inflation (the rate at which the cost of education increases each year) has averaged 10% over the past 15 years – that’s 4% higher than general inflation.
Not budgeting or planning adequately for the rising cost of education, and not accounting for education inflation, may put a lot of pressure on your monthly budget.
Using credit to fund education
It is not uncommon for parents to turn to credit to fund their children’s education.
“Although the power of compound interest works in your favour when you invest, the same mechanism works against you when you borrow. This makes credit the most expensive option – especially if you are making use of an unsecured personal loan,” warns Saleem.
If you commit to a long-term savings plan when you child is born, it is less likely you will find yourself in such a situation.
For more guidance on how to save for your child’s education, Allan Gray has launched a free saving for education email-based series. To sign up to the free series, click here. Investors will receive the five-part series in a once-per-week email.
More about the expert:
Saleem Sonday was appointed as head of the Group Savings and Investments team at Allan Gray in 2016. He joined the company in 2006 as head of infrastructure and support services, moving on to look after the marketing, distribution and investment servicing of the Allan Gray funds to third-party channels in 2010. He has an MBA from UCT and completed an executive development programme at IMD. Read more about Saleem Sonday here.
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