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Saving enough for children's studies

Nov 28 2014 17:07

A Fin24 user is not sure whether his savings plan for his children's education will eventually end up being enough. He writes:

We have two boys. The first is four years old and the other one year old.

We invested R100 000 for each boy in a fixed deposit at a bank over five years without collecting any interest.

The current interest in this case is 10.18% over the five years fixed and one earns interest on interest.

Will my boys have enough money to go and study in around 20 years from now if you take into consideration one would need R360 000 for a three year university degree in todays terms?

Aurum Trust expert Gustav Potgieter CFP® responds:

Congratulations. You are planning long in advance to give your children the advantage of furthering their studies, but an investment in a bank account will not help you reach your target.

The nominal interest rate on your current 5-year investment is about 8.6%, but due to the capitalisation of the interest it becomes 10.18%.

The two children are both minors and the interest can become taxable in the parents' hands in future, depleting the return.

The average education inflation rate is about 13% - about 6% higher than the quoted inflation rate. This means the current R360 000 is going to be about R2m for your eldest, in 14 years' time, and R2.8m for your youngest in 17 years' time.

You need to invest in inflation beating investments and you can take some risk. I suggest the money is rather invested in unit trusts, which have proven over time to beat inflation.

Making the following assumptions your plan could look like this:

- Invest in funds that are doing an average of inflation plus 6% over the relevant periods;

- The money in the bank is also invested in the abovementioned option after the 5 years;

- Education inflation averages 6% above normal inflation.

To be able to reach the respective goals, you need to save an additional R3 300 per month for the eldest and R2 950 per month for the youngest.
Most balanced funds have a benchmark of inflation plus 6% - the minimum return you need to save for the education fund.

An education policy is also an option, but the cost and inherent tax should be considered and I seldom recommend this as an alternative.

I recommend that you speak to a CFP® who can assist you in developing a strategy and plan to reach your goal of providing enough money to give your children a tertiary education.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

education  |  savings  |  money  |  money clinic


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