Tips and traps on investing for the kids’ education
- Financial Planning
The recently proposed overhaul of needs-based school funding may result in higher costs to parents who want to send their children to private schools. At the same time, revisions to the HECS system may mean a more onerous obligation for those tomorrow’s university students. Even without these changes, the cost of education is already a major expense for many families who want their children to have the best opportunities to succeed at school, in tertiary education and in their future careers.
The expense can be astronomical
Private school fees can easily amount to $20,000 a year or more for each child. Multiply that over 13 years of schooling and the figures become mind boggling. Add to that the extracurricular costs, such as books, materials and excursion fees and the total amount to educate a child can become quite overwhelming.
Many parents and grandparents are keen to investigate ways of saving and investing as a way of addressing this challenge, but choosing the best vehicle to do this can be daunting, so here’s a bird’s-eye view to help get you on the right track.
Savings accounts and term deposits
The simplicity and security of a savings account from a bank, credit union or building society holds appeal for many as a way to save for a big ticket goal, such as education funding. Term deposits are attractive for similar reasons and may give better interest rates if you are able to commit to locking funds up for a set period.
The downside of these products is often the mediocre rates of return that can be further eroded by inflation and income tax on returns, so while they may not get you to your goal as effectively as you would like.
At the other end of the scale, investing directly in a growth asset, such as shares bought on a stock exchange, can be one way of creating an education fund nest egg, but along with the potential capital gains and dividend income they may provide, there are also the risks of having your investment narrowly focussed on the fortunes of the companies that you invest in.
University students are set to face higher fees as part of the 2017 Federal Budget
Managed funds are an effective and convenient way of pooling your money with other investors to achieve a diversified investment across various asset classes (such as shares, fixed interest and property). They can deliver attractive capital growth and income returns, but the underlying assets may rise or fall in value, which means there are some risks involved too. They are generally best suited as an investment for a medium to long term, which may well make them a good option for education funding purposes.
Investment bonds, which are sometimes referred to as ‘insurance bonds’ or ‘growth bonds’, are a particular class of investment that are similar to a managed fund, but have some of the attributes of a life insurance policy. This can make them a very tax effective way to invest for a long-term goal, such as education funding, as long as you conform to certain rules for making contributions and withdrawals.
“Purpose built” education funds
There are companies around that market special investment vehicles targeted at those wanting to save for children's education. While the marketing and positioning of these funds may seem attractive and they may well have some merit, you need to be careful in vetting exactly what it is they are offering and how they are structured.
Issues to check for include such things as what fees they charge, how much and how often do you need to contribute, what investment options do they offer, when can withdrawals be made and for what purposes and what happens if your circumstances change and you can no longer contribute.
Creating your own portfolio, using the other investment vehicles mentioned here, may be a better way to achieve your goal, rather than using a pre-packaged education fund solution.
Putting it all together
Like any long-term investment goal, education funding may benefit from having the experience and know-how of a professional financial planner to put together a coordinated strategy, rather than simply relying on one single product solution. This will help balance the risks involved with the potential for substantial capital growth over the period of the investment.
The fact that an education fund is usually planned several years in advance of needing to draw down on investment means that there may be scope to use a combination of growth assets to achieve the best results.
What do you feel are the priorities when investing for your children’s education? Share your thoughts below.