Planning for kids with particular focus on those expensive school years is the first practical thing you can do to ease the burden of your children's education. So for all of you, "Gen Yers" starting to have kids, this week is for you!
Some important questions you may want to consider are:
1. How much will my children's education cost?
2. How do I invest for my children's education?
3. When should I start investing for my child's education?
4. What types of savings plans are available?
5. Should I put investments in my child's name?
If you are thinking of sending your child to private school for some or all of their schooling, the fees could potentially be over $200,000 per child depending on the school you're considering. At the other end of the scale, whilst public schools are much cheaper there are still costs and fees involved (which at the time can be a big outlay from your budget). But, thinking about your children's schooling when they are born can help you plan for the type of education you're after.
Once you have worked out how much you need it is time to put a savings plan into place. There are a variety of investments you could use from high interest earning bank accounts to managed funds. What you choose as your investment vehicle should be dependent on the time frame you have to invest. If your child starts high school next year and they are going to go to a private school then a high-interest savings account may be your best option. If your child is only 1 and you are thinking of private school for their high school education then you have a longer time frame of around 10 years to save, so could look at an investment such as a small share portfolio or even an education bond.
When considering your child's education, don't forget to consider yourself. It's not all about them. If you have a mortgage it may be wise to offset the education savings account against the mortgage thus reducing your interest and helping you pay off the mortgage sooner. Discuss this option with your bank – you may be able to set up an entirely separate offset account or line of credit against your home that you regularly pay into.
If a savings account is going to be the best option for you, the regular savings amount is the most important factor. For example, starting with a $1,000 initial investment and adding $100 per week to it will give you around $29,000 to put towards schooling over a 5 year period, even with today's low interest rates. Stretched out over a 10 year period and that figure becomes almost $62,000.
If you go down the path of a small share portfolio, you should also consider whose name you are investing the money in. You may be able to invest in your child's name for a limited time as once they start earning larger amounts of interest the tax payable can be quite high. It may be more prudent to open the account in the parent's name with the lowest marginal tax rate or that of the parent that may not be working. The other option could be to set up a family trust for which you should seek specialist advice.
An option not to be forgotten is the investment or education bond, which may have tax advantages, particularly to those who are at a high marginal tax rate. These investments allow you to save regularly, earn a rate of return higher than bank interest, and withdraw the investment amount tax-free if you've held the investment for over 10 years. For a good long-term approach, this might be an option for some parents.
Our advice is to work out how much you may require for education costs, start early, chose the right investment vehicle for the timeframe you have, think about yourself and get the right advice!
We hope you have enjoyed this week's "Money in Life" series. Remember we are only an email or phone call away if you would like to seek advice on how to help plan your family's wealth now and into the future.