Every parent aspires to leave a legacy to their children. I’m sure we can all agree, one of the most invaluable legacies we can leave them with is good quality education. Needless to say, as a certified financial planner, one of the questions I get asked frequently by parents is, “How do I plan for my child’s education?”
The solution to this question lies in making sure you address 2 fundamental aspects of any good financial plan, namely the risk management and the investment management pillars. So, what does that mean?
As a parent, it’s imperative that you review your life cover to make sure that it will be adequate in providing for your child’s education if you pass away, become disabled or if you are diagnosed with a dread disease. To give you an idea of what that amount could be, I recently did an education plan for a parent who plans to take their child to Bryandale Primary, a reputable public school, followed by Bryanston High, another reputable public school and eventually the University of Cape Town. Assuming education inflation at 6% annually, and investment returns of 6%, this would cost you R1 025 688 over the next 12 years to see your child graduating with an Honours Degree in Engineering. A whooping monthly instalment of R7 971 will ensure you have sufficient cashflow to finance an investment for high school and university while still keeping up with your monthly school fees payments for primary school!
| Institution | Total Fees in Today’s Terms | Monthly Premium |
| Bryandale Primary School | R260 655 | R3 135 |
| Bryanston High School | R250 058 | R1 924 |
| University of Cape Town | R514 975 | R2 912 |
| Total | R1 025 688 | R7 971 |
If you decide to take your child to a private school you can use a factor of 2.5 to reach a rough estimate of what it would cost you to fund that option.
In all honesty, if you had a heart attack and died tomorrow, would your spouse be able to survive financially or would they need to sell the house, the furniture and the dogs to make ends meet? Would they have to change schools and apply for social grants? Would they need to survive on coupons or charity clothes? Alternatively, will you afford them a continuation of the lifestyle they are so accustomed to through appropriate life cover, disability or dread disease cover?
A reasonable solution to this problem as part of your risk plan is adding an education funding risk benefit. This benefit can be used to fund your child’s education in the event of death, disability or terminal illness. It’s a fantastic benefit that can help you sleep better at night knowing that no matter what life throws your way, your children’s education will be paid for. Liberty’s option is called the Educator and if you need to know about it, make sure to reach out to your trusted Financial Advisor. The Educator is an insurance benefit and as such it will help to pay for your child’s tuition until they finish university following your claim against the insured event. Believe me it is worth every cent you pay towards its premium.
Once you have the risk management under control, you need to consider viable options as part of your investment management strategy. My personal favourite is a tax-free savings account. Tax free savings accounts allow you to save while benefitting from tax free growth over the lifetime of the investment. This means no capital gains tax, no income tax on interest earned and definitely no dividends tax. The tax free savings account has an annual contribution limit of R36000 and a lifetime contribution limit of R500 000. The tax-free savings account is definitely worth having as part of your investment portfolio to help fund future school fees.
Another option that would appeal to high-net-worth clients is an endowment. Endowments are policies with a fixed term determined at the inception of the policy. The term can be 5, 15 or 20 years during which you have very limited to no access to the funds. Endowments are taxed annually at 30% if you as a parent opens one. The good news is that all proceeds at policy maturity are tax free. You can also nominate your beneficiaries meaning, they can get paid out if you pass on and the proceeds are not stuck in the lengthy and often complex estate winding down process. Endowments tend to be expensive products so if you need to use them, make sure you consult a certified financial planner before you include them in your investment portfolio.
My third pick to help you with creating a nest egg for your child’s education, would be an index fund. Index funds are passively managed funds that allow you to access your money should you need it during the Investment period. You also have the flexibility of starting, stopping, increasing or decreasing your contributions without incurring any penalties. Index funds have a low fee to start investing and could be used in combination with any one of the options mentioned above.
Finally, it is imperative that you make sure you have an up to date will detailing how your child’s education should be funded if you have appropriate funds already saved up. By failing to do a will, you die intestate and this leaves the law to decide who gets what in your estate which can negatively impact your children especially if they are minors. Any inheritance allocated to minors has to be converted into cash and subsequently transferred to the guardian’s fund. Having dealt with enough of those cases, it’s an understatement the value of having a valid, up to date will in place.
So how will you plan for your child’s education? Do you have a valid will in place? Do you have adequate benefits in place to fund your child’s education if life happens to you? It’s women’s month and the power is in your hands! Take action today and make sure you leave your children with a legacy worth remembering.
Author:
Tsungai Masendeke
Certified Financial Planner ®
Managing Director IWCP Proventus
