Invest in your child’s future

As a parent opening a savings account in a child’s name may seem like a great way to give Junior a head start on a lifetime of thrift. However, it can come back to haunt families, especially when university years roll around.

Parents have a huge financial burden these days when it comes time for their children to go onto higher education. Unless you are proactive in saving and investing, you may find yourself unprepared for the high cost of tertiary tuition. Start early in planning for your child’s future, and make regular contributions to the accounts you set up. In fact, choosing the wrong savings vehicle for your children’s future cash could cost them thousands in avoidable taxes and missed financial aid.

Fortunately, there are several ways for parents to save that will not put their child’s future financial aid at risk.

The most important factor is to open savings accounts when the children are young to prepare for their future. An account with interest that is compounded monthly is one way to save. Compounding is when the interest earned is combined with the principal, or original investment, and continues accruing interest from that point on.

Remember, you have to go through the entire process of financial planning – right from identifying the goal to deciding on the asset allocation plan; reviewing the performance, recasting the portfolio and so on – just as you would do for your retirement planning.

While drawing up an investment plan, it is best to map out the corpus a child will require in each stage of his or her life. Also, don’t forget to include pre-school costs and extra-curricular activities in the plan.

Over the years, the average age at which a child starts attending school (pre-schools) has come down to two years. Now, pre-schools cost anywhere from R1 000 and R3 000 a month on an average. Once a child turns five, the parents have to choose between a state secondary school that can cost anywhere between R700 and R1 000 a month or a private school that costs about R4000 a month on average.

Then, of course, there are music and drama classes and sport or holiday camps to be paid for. Another factor to be borne in mind while calculating future costs is the inflation in the education sector.

And these amounts increase steadily as the child gets older.

Again, while budgeting for cost of extra-curricular activities, you need to identify say a sport that your child may be inclined towards.

Next, you can try to do some research on the cost of training it may entail. “Sometimes, parents assume that it is beyond their means to provide for a particular aspiration of the child. But penning down the costs and actually reviewing your surpluses and existing resources – investments and savings – can throw up surprising results,” says a financial advisor Lowvelder spoke to.

The type of education you choose for your child is a personal choice. But the one thing is certain and that is that a good education is a long lasting and valuable gift.

How much does a good education cost? No-one can be certain, but in the 15 years to March 2012 ABS data indicates that education costs rose by around 119% compared to just 48% for average inflation. And this pace shows no sign of slowing any time soon.