Funding your children’s education expenses can be costly. The money you spend on your kids’ education could be one of your family’s biggest expenses.
Research conducted by The Australian Scholarships Group (ASG) on education costs, provides some context. The research is based on a child starting pre-school today and suggests that opting for the private school route from Prep – Year 12, will set you back a cool $367,569 per child. Even if you decide on a government school for primary years and private for secondary, you will still need to come up with $244,822. Ouch!
For most families, at the time when kids are starting out at school, household budgets are already stretched with mortgage repayments, bills and living expenses proving challenging enough. What this means is that some careful forward planning is required to make sure you have enough money to give you, and your children, the full array of options for education.
Here are 5 tips to consider:
1. Plan for your children’s education.
It is important to have the discussion with your partner, do your research and estimate how much it is going to cost you. Open up dialogue with your better half about what you want your children’s education to look like is the number one priority. Is it through Private or Government schooling? Do one of you want to send them to the school you attended as a child? Does your child have any special needs? The sooner you have these conversations the better.
All schools have websites. Check out those that you’re interested in. Most should include information about fees and advise you whether there is a waiting list.
There is a heap of great resources out there to help you on your way. The ASIC Money Smart website and the Australian Scholarship Group’s online calculator are a couple to try out.
2. Start saving early!
Like any other long-term savings goal, the sooner you start, the better! The best time to start saving is when your child is born or possibly even earlier. Make a budget and decide how much you can put aside each week. Look to increase the amount each year to ensure you’re keeping pace with inflation.
To get you started there are a few ways you can go about it. It could be as simple as setting up a direct debit from your everyday account into your savings. You could also make a lump-sum contribution, such as your annual tax return or end of year bonus.
The sooner you start, the longer you reap the rewards of compounding interest.
3. Structuring things right and invest in the name of the parent earning the lower income.
If one member of a couple isn’t working and staying at home to look after young children, or working part-time, chances are their marginal tax rate is low. Therefore, holding investments or savings accounts in their name may be of benefit. Keep in mind any future plans of that person returning to full-time work.
4. Once you have a little bit of savings behind you, look to get that money working harder for you.
An investment in blue chip Aussie shares and managed funds can be a great way to accelerate your savings. Bear in mind that these investments are riskier than leaving your money in the bank and that you won’t get rich overnight. A 5 year plus time frame is appropriate.
An alternative investment vehicle is the use of Investment Bonds or Tax Paid Bonds as they are sometimes referred too. They provide a variety of investment options such as shares, property and fixed interest. The reason why investment bonds are referred to as a tax paid investment is because any earnings get taxed at the company tax rate of 30% within the investment. As long as money remains invested for 10 years, the investment provider pays the tax on the investment earnings so you don’t have to report the earnings in your tax return. If you withdraw before 10 years, then you would need to include earnings in your personal income tax return.
Note – minimum investment amounts and costs such as brokerage, or entry and ongoing management fees will apply with the above-mentioned investments.
5. An alternative – saving in an offset account against your home loan.
Another simple, but potentially a very effective way of saving for education costs is through your home loan. An offset account allows you to make extra repayments into a bank account attached to your home loan. It operates much like a normal bank account with some special features. Namely, the amount you have in the offset account effectively reduces the loan balance the bank uses to work out your interest payable on your home loan. For example, if you have a home loan of $300,000 with $100,000 in an offset account, the bank calculates interest based on only $200,000.
The money you have in an offset account is generating an after-tax return equal to the interest rate of your home loan. For instance, if your bank is charging you 5.00% interest on your loan, the funds in your offset account save you this rate of interest being charged. If you compare this to saving money in an ordinary bank account, the bank may (if you’re lucky) pay you 3.00% interest on your savings, from which you still need to pay tax.
The key to using this option is discipline. Money in an offset account can often provide a temptation to use the money for other purposes; renovations, car upgrades, holidays etc. If you plan to use these funds in the offset account to save for education costs, then you must resist temptation.
My advice is to start early, work out how much you will require for education costs, how much you will need to save to get there and then select the appropriate savings vehicle. Seek the help of a good financial planner to set you on the right path.
Are you interested in planning for your children’s education? Are you currently juggling education costs and need a plan yesterday? For your free initial consultation call our office today, toll free on 1800 679 000 for our Rockhampton office and 1800 804 431 for our Melbourne office. One of our friendly advisers would be delighted to speak with you.