Women's Wealth Expert
If you think that a university degree costs a small fortune now, imagine what it will cost by the time your child reaches university age. The very thought of footing the bill is, for most parents, quite daunting, and there isn’t a lot you can do to change what it costs. What if your child decides to become a doctor! And, let’s not forget primary and secondary school fees. But there is a way — it just requires a little education on your own part.
Holding up a sign outside of parliament demanding lower fees isn’t the answer. You might get your photo in the paper, but you will probably be wasting your time, as those fees just keep rising!
So, what else can you do?
- You need to document a savings goal. Be clear on what you are saving for, as a clear goal can stop you from dipping into the money for other things. Is your goal to save for university fees, private school, or both? You may have more than one goal.
- How much is enough? Do some research on fees. Talk to some good schools and universities to find out how fees have increased over the past 5, 10, or 20 years, and use this to estimate fees in future. Bear in mind that fees will increase, but not necessarily at the same rate. Remember, it’s your best estimate.
- Start saving, and remember that it’s never too late. Decide when you need the money. The best way to approach your child’s education is to create a savings plan around the time of birth, and put a small amount away each week. A household budget will show what you can afford. Determine how long you have to save.
- You need a savings account. See if you can find one with no fees and ask your employer to set up an automatic deposit from your pay. However, this is not going to give you a good return. Remember, you’ve worked hard for the money, so the money must work hard for you.
- Make an assumption about the rate of return you want.
a) A cash return – transfer money into a term deposit (TD) and roll it over every three months to get the best deal. Today, you will probably earn less than 3.0 per cent per annum. Over time, rates will probably average closer to 5.0 per cent. When rates are low this will pull down your ability to grow your capital. Also, a low return in the first few years can have a significant impact on the long term balance.
b) A higher return – over the longer term, the share market generates between 7.0 and 10 per cent. An extra 2 per cent over 17 years will reduce the amount you need to contribute.
c) Learning to invest in shares directly yourself means that you don’t follow all of the ups and downs of the market, and has the potential for growth at the higher end of the range. Therefore, your contributions could be even lower.
- How much do you need to contribute? Say your goal is to put your child through university, in 17 years, at a cost of $80,000. With an initial contribution of $1,000, and a return of 5 per cent, your monthly contributions would be around $240 per month. At 7 per cent, it is around $195. Closer to 10 per cent and it drops dramatically to $140. If you only have 15 years the monthly contribution increases to around $290. This is where the rate and time are really important. Experiment with a savings goal calculator at the Money Smart website.
So, if you fail to plan, you plan to fail. The alternative is to inform your child that you will not be able to pay for university fees. With some young ones the idea of having a huge Higher Education Contribution Scheme (HECS) debt may put them off study. To find out what is involved with HECS research www.ato.gov.au.
Some parents prefer their children to pay, as they believe that the child is more likely to value what they choose. However, it’s a massive debt and it takes years to pay back, at a point when they are finding their feet and really starting to experience life.
Or, you can teach them how you saved and invested, which will be as important as getting the education.
Janine Cox is the Senior Analyst at Wealth Within