Education is expensive and parents want the best for their children. So how important and what is the value of a ‘college fund’?
It is vitally important that parents start saving towards a “university fund” for their children.
School fees increase every year by more than inflation, which is currently sitting at around 13% per annum. It is therefore important that parents start saving as soon as possible, and that the appropriate return on investment is obtained, ie. That the funds are growing at above inflation returns.
In what ways, other than educational policies, can parents save money for their children’s education?
Unit Trusts: Saving for an education means that you have a savings timeline of at least 12 years if you start saving from the time your child starts primary school. This makes unit trusts an ideal investment vehicle for you.
If you are able to start investing funds from the day your child is born, you have 18 years to invest in the markets. In this case I would suggest that you invest in a pure equity portfolio, as the longer the time horizon in the market, the more aggressive one can be in order to maximise on returns.
Alternatively if you have a shorter time horizon- say 8 years, you can invest in four different asset classes – property, equity, cash and bonds. A balanced unit trust fund will have some exposure to each asset class so that your investment is diversified and you are protected from losses. For example, if equities perform badly in a year, then you can recoup your losses because property might have outperformed the market.
If it is a case of either or: What is more important, an educational fund for your children or attending to your retirement savings?
It can seem unnatural — even unholy — to consider giving your own retirement priority over saving money for your kid’s college. After all, as parents you want to provide the best education possible for your children. But most financial advisors recommend giving funding priority to your retirement over college for your kids. Why, you ask?
You can’t help your kids if you are in trouble.
When airlines are doling out safety instructions prior to a flight, one of the directives they are clear about is that you should always put an oxygen mask on yourself before putting them on others. This is not at all a selfish act — before you can help someone else, you first have to make sure you are in a position to do it.
This is the exact analogy we should apply to retirement savings over college for the kids.
Building a retirement plan is more than just preparing for your retirement — it’s creating lifelong financial security. You are designing a long-term investment portfolio that will give you the financial ability to pay for your children’s tertiary education.
You can borrow money for college, but not to retire.
Though it is obvious that borrowing money for college is an option that we would rather not take, the reality is that it’s a choice that exists. Conversely, there is no way you will be able to borrow money from a financial institution to provide for your own retirement.
There are various ways you can borrow money to help pay for your children’s college education. You and your spouse could take student loans, your kids can take out student loans or you can borrow against tangible assets, such as your home or any other types of real estate that you own.
Written by Karen van Rooyen
Tags: education, financial security, investments, retirement, savings
Categorised in: Investments and Savings
This post was written by thys