How to beat the back-to-school financial blues

The start of the new year is when many re-examine their education budget and ready their finances. But with the back-to-school period a busy and often stressful time, it can be worth considering one’s options ahead of time.

All parents want the best education for their children and the cost of schooling in South Africa is dependent on whether a child attends a public or a private school.

Whatever your situation, there are various ways to save towards your children’s education, including:

• Having a monthly budget
• Using your annual bonus and savings to pay fees upfront, and
• Investing in an education plan.

The first tip when it comes to paying for your children’s education is by working fees into your monthly budget, if you are fortunate enough to have a set monthly income. If not, you could use any annual bonus or savings to pay school fees upfront – the advantage of this is that many schools offer a discount to those who pay in advance. However, an important thing to note is that this discount should not entice you to borrow money to receive it.

An education plan is an assurance product, with the one downside being that parents only have five to six years to save for a payment plan period of 12 years of school fees. A way to limit this is to use the plan solely for secondary or tertiary education in an attempt to compound the investment.

Education savings take many forms, one being endowment, which is recommended for parents in a higher tax bracket. Within this option interest is taxed at 30%, capital gains tax on the equity portion is 10%, and you won’t have to declare anything on your tax return – there is a minimum five-year term, and once the term is over you can take money out when you need it.

Another appealing factor of this option is that the policy may be taken out with your child as the policy owner, which is beneficial in the event of a divorce and would mean that this asset will be kept out of accrual and will thus not be touched.

A unit trust is another option for education savings, and the tax on this will depend on your tax bracket – if you are in the top tax bracket, your interest will be taxed at 45% and capital gains at 13.3%, and in South Africa we are allowed an annual interest exemption on the first R23,800 of interest earned per year; the first R30 000 per year earned in capital gains is also excluded from tax.

Take these exemptions into account in your calculations when considering an endowment versus a unit trust as a saving vehicle. This option of education savings allow for flexibility, meaning you can take out what you need for school fees, sport or books. It is also similar to endowment in that the policy could be owned by the child who is the beneficiary.

Tips for the coming back-to-school season

Think about saving throughout the year since January is usually a tight month after the holiday season and money for laptops, uniforms and school books may not be attainable, or worse, could mean putting yourself in debt and spending the rest of the year paying back money owed on a credit card. An easy way to make sure you save for the school season is by depositing money into a money market account every month.

Another tip is to make a comprehensive list before you shop for supplies, and to prioritise between wants and need.

Do your research on costly items such as laptops to find out if they will be suitable later in your child’s schooling career.

It could be wiser to spend a bit more money for the laptop now to avoid having to buy another one in a few years’ time.

If your child relies on transport, whether public or private, to get to school, factor this into your monthly budget as well as any extra-curricular activities.

Aftercare fees also need to be considered to make sure you are financially prepared when this back-to-school season approaches.

Preparing for the back-to-school period may seem a tedious and financially demanding task throughout the year, but if you stick to it your January pocket will thank you for it.

Kerry Sutherland is a senior wealth manager at Alexander Forbes.

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