Are you saving enough for your child's future?
According to Jenna Hartley, Investor Consultant at 10X Investments, many South African parents place significant importance on ensuring that their children receive a good education. “The challenge however, is that all too often, parents have simply not saved up enough to be able to comfortably fund their children’s tertiary studies. To prevent this from happening, parents should prioritise long-term financial savings plans that will enable them to send their children to a reputable tertiary institution.”
Hartley provides some saving tips that can help you prepare for your child’s future financially:
Know your goal
Before you consider saving for anything, set a goal. Knowing what you’re saving for not only makes the task tangible, but automatically gives greater meaning to your saving - for example saving for your child’s tertiary education.
When you set your goal, it should also be financially realistic. Luckily, if you’re looking to start saving for your child’s education early, you should be able to keep your monthly contributions relatively low and avoid a heavy financial burden later in life. The magic of compound interest will allow you to put away a small amount each month and still be able to afford the yearly tuition fees.
For example: A student starting a BA degree at the University of Cape Town would have to pay R46, 000 in tuition per year, for at least 3 years. An extra year could be added on for post-graduate studies.
Taking the example further: a forward-thinking couple, expecting their child to be born early in 2017, might want to save for their child’s university degree 18 years on. Assuming fees go up around 10% each year (inflation plus 4% pa), they need to save R1, 100 a month in a High Equity unit trust, with 1% per annum in fees, for all 18 years to have saved enough money to cover four years of tuition.
This total equates to R400, 000 in today’s money, without the effects of inflation, which is a serious sum of money.
Use the tools on offer
Luckily we live in an age where you are spoilt for choice when it comes to choosing how you want to save. There are shorter-term saving options (less than five years) like fixed deposits, money market accounts and 32-day accounts. All these short-term savings vehicles will help you save without exposing you to the potential volatility of the market. However, keeping your money in these “safer” options for a long period of time means you barely keep up with inflation.
If you’re looking to save long-term, maybe 15-20 years for your child’s tuition costs, then you need your money to do more than just keep up with inflation. This means investing in equities on the stock market as a reliable way to create long-term wealth.
This might sound like a “riskier” strategy but for the long-term investor, a high equity portfolio actually presents less risk than a low equity portfolio. Research shows for every five-year period since 1900, a high equity fund has the same risk factor as a low equity fund, but also offers the possibility of earning almost double the return.
This is where a product like a unit trust becomes viable. Buying stocks and shares yourself is often too expensive and complicated, but with a unit trust you get the benefit of owning shares that you might not have access to.
If you’re looking to invest for a long period, consider choosing a unit trust that has a low fee structure. Fees can eat away at your returns, so picking a low cost option will be beneficial in the long run. Index tracking unit trusts are often the most affordable as they remove cumbersome management costs and performance fees. They are also proving to be a more reliable investment as only 1 in 5 active managers beats the average market return.
Stay calm and do nothing
Having decided to set up your unit trust, with your monthly contributions invested each month, you can sit back and relax. All you need to do now is let your investment grow with time - and don’t touch it.
Unfortunately, that’s easier said than done. Emergencies happen and you might have no choice but to dip into these investments. One of the advantages of a unit trust is the access you have to your money, but it also increases the temptation to do so.
The way to get around this is to have a contingency amount ‘banked’. Look at your monthly salary and try to put away enough money each month until you have between three and six months’ worth of salary saved. Open a separate account that you can access easily in the case of an emergency, and store that money for the proverbial rainy day. Now that you have that buffer, you shouldn’t need to dip into your long-term investment.
“In the end, long-term savings are much like raising a child. They start off small and quite vulnerable to the outside world. However, with time, patience and quite a bit of perseverance your savings should mature into something you can be proud of,” concludes Hartley.