All parents want their children to have the opportunity of the best educaiton their wealth can buy. However it can cost over $250,000 to fund a child through secondary private education and university, and it is not unusual for fees to rise between 3-5% per annum. Costs can also increase dramatically for students wishing to study overseas.
Much like retirement planning, it is vital that you address this issue at an early stage. Education fees planning is not an exact science, but sensible assumptions can be applied to remove a large part of the guesswork. We quantify your education funding needs and then suggest a clear financial strategy to ensure that your child gets access to the best education your money can buy. When we assist a client with quantifying their children's education funding needs, we take into account the following considerations:
- Your child's current age
- How much you have saved to date for this objective
- How much you can afford to set aside each month.
- How many more years before college commences
- The anticipated annual fees, and at what rate they may increase
- The currency in which the fees will need to be paid
- Length of the college course
- Expected living costs (rent, food, clothing, parental visits, etc)
In America for example, 4-year college fees, depending on its status as State or Private, could typically cost $40,000-$160,000 excluding extras. College fees typically rise by about 3-5% per year so it is futile to invest in a low yielding asset like a bank account which cannot currently keep pace with the rate of rising fees. Unless a child achieves a full scholarship, you may need to do one or more of the following:-
- Pay from your salary at the time it is needed;
- Donations from a third party, e.g. Grandparents;
- Raising a mortgage or personal loan;
- Pay from accumulated savings, or withdrawals from investments.
Solely relying on having enough money from salary at the time your child enters college is a dangerous strategy. Many people cannot rely on family and you should avoid loans so you must usually save from salary in advance and/or invest accumulated cash:-
1. Invest Accumulated Cash
Many options are available including the use of both actively managed mutuakl funds and passive investments (e.g index funds, ETF's), which aim to provide returns greater than cash albeit with a degree of risk.
2. Regular Savings Programs
If you have the foresight to start saving when your child is born, you have 18 years to accumulate funds for college. For example, should you need a college fund of US$200,000 and the regular savings program achieves an average return of 7% per year, the commitment would be approximately US$550 per month. However, if you avoided planning until your child was 10 years old, the monthly contribution would be US$1,250 per month. Like retirement planning, the cost of delay is huge.
It is never too early to start a college fees program. The dangers are inaction and under-estimating the true costs of children’s education. There are few more crushing blows than parents realizing that they cannot afford to send their children to a college or university of choice. Don’t let that happen to you! To discuss funding options, please contact us.