 |
|
|
 |
||
|
indwe magazine – April 2006
|
||
|
Planning Your Child’s Education - “Have you done your homework?”
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
 However, despite this large education invest-ment consideration, tertiary costs continue to increase at about 10% a year. As a result of South Africa having to compete more and more in a global market, both the private and public sectors are seeking more highly qualified workers.So, for the average South African this means that one must either find a winning entrepreneurial solution or get the best possible tertiary education. These days a standard undergraduate degree has about as much clout as a matric certificate 20 years ago. Combine this with the scarcity of jobs in most South African industries and the oversupply of labour in lower to middle level positions, and the message is clear. In order to secure quality employment, one needs a quality tertiary education. Exorbitant tertiary education costs that are increasing every year have made studying away at good universities highly exclusive. Most people are not able to fork out around R50,000 a year from their normal disposable incomes. Securing scholarships and financial aid is becoming increasingly difficult. Student loans literally shackle a graduate to years of debt repayment, given that a graduate will take a few months to gain employment and a few years before he or she can start repaying the loan, by which time huge amounts of interest have been accrued. If a graduate cannot find employment for extended periods of time and cannot finance a student loan then parents will be rendered liable for repayment. Hence there is a dire need to plan for one’s children’s education. A simple rule of financial planning applies and is paramount to the success of an education investment plan – the rule is to start early! One needs to be aware of the various costs associated with tertiary education. A year’s tuition cost is currently generally in the region of R20,000 per year and a year’s accommodation in residence with meals is likely to cost over R20,000. These are the basic costs involved when studying away from home; on top of these you need to consider pocket money, study material and various other miscellaneous costs. It is important to set out a budget using today’s costs and to do a forecast using the expected education inflation figure to determine what will be needed for your child’s tertiary education. Using 2006 university fees per annum from three prospective universities around the country, we get the following:
Assuming you want your son or daughter to study a 3-year Bachelor of Commerce degree at Rhodes, this is how much you will probably need for year one in today’s terms:
After determining how much will be needed, the next step is to decide on an investment plan. This will vary according to the amount of time you have on your hands as well as your risk profile. This is why starting early is so crucial. Besides having to put less away each year, you can also take advantage of the long-term capital growth prospects offered by investing in the equity (share) markets. If you have more than 10 years to go before your child will go to university there is sufficient time available to invest into the equity market. In the short-term equity investments are volatile and capital values may fluctuate, however historical evidence has shown that over the long term equities outperform other asset classes and inflation. With less than 10 years to go, one could start moving the capital out of equities and into a more balanced portfolio that is less susceptible to market volatility. If you have planned and invested well then you should be able to move your money into the money market (fixed deposits etc) about 3 years before the tertiary education will commence where it will be safe from any market volatility. To give you an idea how much one would need to invest in order to make the required provision for future education costs, studying a 3 year BComm degree at Rhodes, we make the following assumptions: that your child is currently 4 years old, that you will increase your monthly premium contributions by 10% each year, that you have no current provision set aside, that your investment will grow at a net growth rate of 10% per annum and that education inflation will be 10% per annum. Using these figures, you would need to invest an initial amount of R852 per month increasing at 10% per annum over the 17-year term of the contract until the 3-year degree is completed. This graph indicates how much capital will remain after each year of study given the above investment
The following table gives an indication of cash flows over the 3 year degree (using future costs)
If you continue to contribute in your child’s third year of study you will have a balance of R54,656 at the end of that year which may be used as you see fit at that point in time. If you stop contributing at the end of your child’s penultimate year of study there will be a balance of R594 at the end of the third year. What is interesting to note is that if you starting saving one year later you would have a shortfall of R44,000 at the end of the third year, again demonstrating the importance of starting as soon as possible. |
