Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
129. Tomorrow's Tuition: Starting the Education Savings Journey Today
What does it really take to fund a child's education without drowning in debt later? We crunch the actual numbers and reveal practical strategies that every parent and grandparent should know.
Starting with our listener's question about university funding, we break down the monthly commitment needed from birth: R2,300 monthly invested over 18 years will cover four years of university education (approximately R155,000 annually in today's money). Add just R260 more for a starter car when they begin their studies. The total - R2,500 monthly - creates a solid foundation that can alleviate significant financial pressure during your 50s when you should be focusing on retirement preparation.
For families wanting comprehensive coverage, we explore the full education journey, revealing that R5,000 monthly from birth would fund everything from primary school through university. We don't just present the numbers; we delve into sophisticated investment strategies, explaining how to structure education investments based on time horizons. Our suggested approach includes creating separate targeted funds for different education stages with tailored risk profiles for each.
The conversation takes an interesting turn when we discuss how endowments can be strategically deployed for education funding, particularly for those in higher tax brackets. The "staggered endowment" approach we outline provides both tax efficiency and perfect timing alignment with educational expenses. Perhaps most valuable is our discussion about involving grandparents and extended family - transforming well-intentioned but often forgotten birthday toys into meaningful contributions toward your child's future.
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Hello everybody, welcome to Know your Money. I'm Bronwyn Wehner.
Speaker 2:And I'm Craig Finch, and we are from Growth Financial Planning. We hope you enjoy our podcast.
Speaker 1:Hello everybody. We got a question from one of our listeners and they wanted to find out if you had to start saving for your grandchild or your child's university education. How much would you need to be putting away every single month from now to be able to provide for the amount of money that you would need for four years university? So we went and did a few of the calculations. Craig, do you want to explain the first one?
Speaker 2:Okay. Well, in my view, there's two parts to this. Because you will come to a situation where your child needs a car, so you need to provide for a car as well. So it's university and a car. In my experience, it's good to take away that pressure, at least that pressure. So you normally are maybe around 30 when you get married, have children, et cetera. So by the time you get into retirement 55, 60, maybe a bit before that you want to finish paying for education, because education does cost a lot as junior school, because education does cost a lot as junior school, primary school, nursery school, high school. But after all that, you want to say, right, phew, I've got a fund for university and I don't have to worry about university. So we did a calculation of what would you need. So it's approximately R155,000 and that was a broad figure in today's money. What will it be in the future? Is that just university?
Speaker 1:Yes, 150,000 Rand for the university for one year. No we did four. We did four, so you can Worst case scenario.
Speaker 2:Yeah, worst case scenario.
Speaker 1:If they're really smart yeah.
Speaker 2:If they do three, they wanna stay on another one and they always wanna do honors or something like that, so do four. Yeah, so it's sort of a base degree R155,000 a year for four years, starting when the child is born and ending when the child goes to university. So it's 18 years and the number would be R2,300 a month.
Speaker 1:Right that you have to start saving on the day they're born.
Speaker 3:So is that just university?
Speaker 1:Just university.
Speaker 3:Yeah, because that car's a killer, right.
Speaker 2:So we did a car. The car's actually not so bad. Not so bad. We did a car and the car would, be say, a 100,000 Rand car.
Speaker 1:In today's terms.
Speaker 2:In today's terms.
Speaker 1:Also running it for 18 years and you need around 260 Rand a month. So call it two, five a month that you'd put away Right To pay for four years university and buy a car.
Speaker 3:Does that make sense? That does make sense, yeah.
Speaker 2:So there will be other costs at varsity. I mean that so you could provide more, but that at least you'd say, by the time Finn goes to university you don't have to worry about paying for the fees Maybe even residence fees are included in that and you can buy him a car, and you'll still need to give him pocket money et cetera. But we could do another calculation for that. But at least it alleviates the pressure of continuing to pay for those varsity fees and residence fees and buy him a car et cetera.
Speaker 3:Yeah, yeah, that all that seems totally worth doing. I think the problem may come in is continuing to make that payment when you then have to pay school fees as well, yeah. So I know young Gabriel here did a calculation of how much you need to do per month if you want to do the whole lot.
Speaker 1:What do you mean by the whole lot?
Speaker 3:So if you start when the child is born and you want to be able to pay school, high school, private schools and university, so not primary and not preschool. Not primary and pre Okay.
Speaker 1:Well, no primary, yeah, primary, but not preschool.
Speaker 3:Okay, so it was just a basic calculation we did in the interest of this episode and that came out around 5,000 Rand a month, and what that allows you to be in a position is not to ever have to go into a negative equity or debt during that period. So, if I remember the chart correctly, basically if you did the 5,000 Rand a month by the time they finish the third year it doesn't allow for the fourth but by the time they finish the third year, the pool of money that's left is 700 Rand.
Speaker 1:Sure, you see and that's the thing I think that is quite important is a child's born and you're just kind of doing the nappies and doing all the things and you're not thinking about school coming up and this like whack in your budget. I always try to suggest to them okay, start putting 5,000 Rand a month away so that when you do reach school you can pay the full amount. And what's nice is you normally get a discount like a 5, 8 or 10% discount.
Speaker 3:We got a decent discount by paying full term, not even the whole year.
Speaker 1:Exactly so. If you the day your baby's born, if you can consider, okay, cool you know. Let me start considering the education, either like you're doing that, five a month, or at least the two and a half so that university is covered.
Speaker 3:So this is my plan, bron. You know I'm going away at the end of the year for a little bit of work, and so I want to catch up the two years, because he's two in August. Okay, where do I put?
Speaker 1:that money guys. So when you say you want to catch up that money, is that to pay?
Speaker 3:I'll have a lump sum of the two years that I haven't been paying it. So I haven't done any savings so far. So I'll have a lump sum of those two years. Where do I put that money?
Speaker 1:So my question here with this is that two years worth, is that going to be the money that's going to fund Finn's first grade? Is that going to be?
Speaker 3:the money that's going to fund Finn's first grade From primary school yes, grade R.
Speaker 1:or is it going to be the money you're going to use to fund his university?
Speaker 3:No, no, no, From primary school onwards, so that I don't have to stress. From that point, I'm just putting away the 5,000 Rand a month and I'm good Into that.
Speaker 1:Yeah, yes. So in my opinion and maybe, craig, you have a different view on this but I would generally break up that money into two parts. So the first part when we do planning time horizon is the most important part. One of the most important parts when you do planning, because if you're going to need the money within a year, it needs to be in a money market cautious kind of fund, but the balance of your money needs to try and keep getting that growth. So when you get there and inflation comes into play, that money's grown enough and kept up with inflation or above inflation. So I would probably take a part of that.
Speaker 3:So maybe for two years worth of no, we've got another four years till he starts school.
Speaker 1:Yes, so you put a little bit in a cautious fund and the other half you can either put in medium term or um aggressive and just sort of break it up, I agree with you and the timeline for a withdrawal.
Speaker 3:so you know, like with my bank accounts, they offer, you know, savings account, 30 day notice one and you get a decent eight percent on it, so it's not bad. What are the other options then? So if I was to get to the point when he's six, from six onwards, every year, I need to make a payment. Yes, so what fund is the money in then?
Speaker 1:So that's a really good question and one of the things I do with clients. So this I think it's such a cool episode that we can talk about in another one. But you get a unit trust which is kind of like your money markets it's your bank account sort of thing or you get an endowment, okay. So an endowment is basically there for clients whose tax bracket is above 30%, but not only that like if you want to nominate a beneficiary and it doesn't form part of your estate, you'd use an endowment. So what I do with clients is every year they start a new endowment. So you'll start a 2,000 Rand, two 2,000 Rand endowments and then you'll start another one and another one. So an endowment is a five-year term investment. So at the end of that five years that money comes out and any gains that you've made so capital gains is taxed within the product. It doesn't form a part of your capital gains.
Speaker 3:Right, so your income taxes.
Speaker 1:So again, it depends per person, because for some people you want to block those gains in the wrapper which is the endowment. For other people you don't have to worry about that and it might be better off for them in a unit trust.
Speaker 1:So to answer your question, it's a bit tough to say which one because it's per client. But for you specifically, I think it would be to break up into those different things. So one would be in a unit trust for that immediate term thing and then it would be to start those endowments and try to have as many as you can, Because once you've passed a five-year term on an endowment you can actually draw an income from it. Interesting.
Speaker 2:So also, I think when you start, you think, well, I'll keep this going for 18 years, Then that's when your grandparents may help. You could say it's the grandparents, and a lot of grandparents want to put say, well, he's got a bicycle, he's got a soccer ball, what else do I buy him? Let me give him pocket money. Let me give him pocket money. And he's like I'll put money into this fund that I've got for him and alleviate your pressure every month as well.
Speaker 3:Now, my father's got the money to do it at the moment, but he hasn't made up his mind what he's going to do.
Speaker 2:Yeah, but that's exactly the point and that could definitely help with university, and for me, university is an easier one to get to because less to put away, more likely you're going to keep the… and more time horizon to get there More time, you're going to keep the premiums game longer. And in your 50s, when you don't have still the pressure of paying for school fees, you can sit back and say thank goodness I don't have to pay.
Speaker 3:I really like this endowment one purely because I think in life you're never going to have that ideal situation where I'm going to put the $5,000 away from the moment they're born.
Speaker 2:No, things will change.
Speaker 3:It's never going to cost me anything else, Something will always happen and invariably, you know, you get to the point where you're starting high school and you go oh, we haven't got the full amount.
Speaker 1:Yeah, so we have to get it somewhere else, something happens.
Speaker 3:But having it in a fund whereby you can and be paid an income effectively, that's pretty cool.
Speaker 1:And also what I normally do and that's why I love Alan Gray. I know we talk about it a lot, but on Alan Gray you can name your investment. So we'll have a university fund and then you'll contribute $2,000 of that $5,000 into the university fund. We'll be super aggressive with that because the time horizon's long. Then we'll have a high school fund and you'll put a certain amount into the high school fund, with a different asset allocation, potentially because of the time horizon.
Speaker 3:Are you talking about the risk effectively of the funds?
Speaker 1:Yes, well, how volatile it is or what the growth can be over the term. And then you have it on your profile. You go okay, cool, this is how much I've got in the university fund, in his high school fund, in this one. If you have to pull from there because something happens, it's not the end of the world, but you've at least broken it up so that you're not going to lose out on the interest because you put all the money in the university fund.
Speaker 2:Why you do what you do yes and also I love yeah, also that if you're, if grandpa, granny or auntie or uncle want to give him a birthday present, you can add it to one of those funds.
Speaker 3:Yes, We've been trying to encourage financial gifts rather than another bicycle, yeah.
Speaker 2:And grannies and grandpas and aunties want to do that because they don't want to buy, and so they'd rather give him money for his education.
Speaker 1:I also want to do like a movement, like when you go to a kid's party, like it should be okay that you give your child's banking details as a gift. You know, because everyone goes and buys this two 300 grand thing that probably is just going to get thrown away.
Speaker 3:You know it happens it gets re-gifted at the next kid's party, exactly.
Speaker 1:I know from experience Exactly.
Speaker 3:You get the cycle of gifts cycling through.
Speaker 2:So I think the purpose of today was to answer the listener's question about what does it cost, so we can do an individual plan for you. The sooner you start saving for compound interest we've spoken about that over the years the better it is that you can alleviate pressure in different times of the education cycle.
Speaker 3:You know, I think it would be really good is if you throw down this Excel or PDF or whatever it is put it in the description of the video.
Speaker 1:Yeah, I can do that, so people can download it. Yes, great idea.
Speaker 2:Great thanks for that question. Thanks guys, bye, bye. Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website, wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.