By Kerry Sutherland, Alexander Forbes senior wealth manager
The arrival of the holiday season means that back to school also looms large, and now is a good time to re-examine your education budget and ready your finances.
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 is, 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 to pay 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 school 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 do this.
An education plan is an assurance product with the only downside being that parents only have five to six years to save for a payment plan period of twelve 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 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 great factor to 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 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 and the first R30 000 per year earned in capital gains is also excluded from tax. Take these exemptions into account in your calculations for 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.
Other tips to consider this back-to-school season are: 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 yet would mean you would put yourself in debt and spend 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 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. This could mean that you would spend a bit more money for the laptop but end up not having to buy another one soon. If your child relies on transport albeit public or private to get to school, factor this into your monthly budget as well as any extra-curricular activities and aftercare to make sure you are financially prepared when this back-to-school season approaches.
Preparing for back-to-school might seem a tedious and financially demanding task throughout the year but if you stick to it your January pocket will thank you for it.