While most parents are probably pleased to have the kids back at school and family routines back to normality, if their children are in the private system one thing they may not be looking forward to is footing the bill for school fees this year.
With the cost of education rising at a faster rate than inflation for decades, it’s become one of the fastest growing life costs for Australian families – and whether you choose to send your children to a public or private school, it’s a big expense.
Australian families spend on average a total of $50,000 on their child’s education and childcare.1 Laptops, school excursions, sports costs and ‘voluntary fees’ are now the norm at public schools and parents will need to have funds available for these.
If you opt to send your kids down the private education path, however, school fees will cost you an average $216 a week, with high income families spending more than a quarter of their household budget on education.2
Although giving your kids a good education might be high on your list of goals as a parent, it’s not always easy working out how much you’ll really need. In many cases, families who haven’t planned for the costs involved with private education are forced to either revise their children’s education plans, which can sometimes mean changing schools midway through, or resort to going deeper into debt to put their kids through school.
It therefore pays to plan ahead, do some sums and weigh up a variety of strategies. If private schooling is on the cards, then try to estimate future costs. Map out the relevant school years in terms of current costs, allow a decent margin for additional expenses outside the core enrolment costs, and then account for future price increases.
Investing is a great way to save for your child’s education, although if you’re not savvy about it, then it’s time to educate yourself. Read widely, seek advice from professionals and don’t be afraid to ask questions. Even if you do know about investing, seeing a professional is still a smart move because although you may have the expertise, investments take time to manage.
Here are five ways to invest and start building a nest egg for your kids’ future education:
1. Savings schemes
Scholarship plans or education funds are still one way people can save for the kids’ education. These plans offer significant tax benefits when the investment earnings from the fund are withdrawn and used for education costs. They offer a variety of investment choices, depending on the provider, and offer a simple, tax-efficient investment structure to achieve your education savings goal.
2. Managed funds
Managed funds can be an easy and effective way to invest for education costs. A managed fund is a professionally managed investment portfolio which individual investors can buy into. You can usually start investing with as little as $1000 then set up a regular investment plan with monthly, fortnightly or weekly payments.
3. Mortgage redraw
Using a mortgage offset account with a redraw facility can be a great option to build education savings within your home loan, especially in the current low interest rate climate. It works as follows: you direct your education savings to your mortgage or offset account, lowering the amount of interest you pay on that debt. Later, you redraw the money to pay school fees. If you’re the type who has the discipline to save via your mortgage, this may work well for you. But if you also redraw for other purposes like upgrading the house, you may start going backwards.
4. Insurance bonds
Insurance or ‘investment’ bonds are long-term investment products issued by insurance companies. As with scholarship plans, if you’re a higher income earner, the big advantage is that you won’t pay any more than 30 per cent tax on your investment earnings, providing you don’t dip into your funds within a 10 year period. So let’s say you plan to send your child to a private secondary school and invested in bonds soon after your child was born, you’ll meet the 10 year rule and can start drawing down on the investment tax-free. It can also be a suitable option for some grandparents wanting to help fund their grandchildren’s education.
5. Start a share portfolio
Depending on your appetite for risk, investing in shares on the ASX is an option to help build a pool of savings for education. You can sell shares down the track and also use the dividends from your share portfolio to help pay for school fees, although this is usually a strategy to supplement another investment option.
1 [*AMP.NATSEM Income and Wealth report, ‘The Cost of Kids’, 2013]
2 [*AMP.NATSEM Income and Wealth report, ‘The Cost of Kids’, 2013]
ABOUT THE EXPERT
Mark Borg is an Authorised Representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.
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