The economics of educating your children

According to latest industry reports, there is a continued rise in private school enrolments throughout Australia with currently 1.3 million students and growing at around 4.5% per annum. The tailwinds of strong demand for private schools,  perceived higher quality of private education and rising household incomes and population growth are likely to increase demand for private education and also the fees. This means that for many families, the implementation of strategic budget and investment strategies is required to ease the financial burden that the private school industry often catalyses.

We here at Pekada understand that planning for this can be an overwhelming and confusing task at the best of times. We practice what we preach here and I am proud and relieved to say that we started our son Remy’s investment bond when he was less than a week old and have been contributing to this monthly. The hardest thing is knowing where to start, so that’s why the team have put together a guide on the top 3 areas of focus to help families budget for their children’s future education, without having to make dramatic lifestyle sacrifices. Take a look.


1. Work out what you need 

Private tuition fees can fluctuate depending on the school your children attend, therefore before you start devising a strategy to cater for these fees, it is crucial to first understand what it is you are paying for. Generally speaking private school fees increase as your child gets older and acknowledging and accounting for this increase will make planning far more efficient and worthwhile.

According to Australian Scholarships Group a child born in 2019 can cost as much as $78,000 through the public school system and up to $351,000 through a private school in metropolitan Australia (estimating that on average the school fees for grammar schools are around $27,000 for one year). These dollars can be a big hit to the family budget if you are just managing this year to year and haven’t set the funds aside, and to make compound the problem in the past ten years the costs of raising children have gone up 45% but household incomes have only by about 23%. 

Tips:

  • Start thinking about what your plans are for education early.
  • Do your research and plan for the actual numbers for the types of schools you are considering. The Good Schools website is a good starting point, although you can always contact the schools directly.
  • Map out the amount of capital you need to fund this. Online calculators are great for this.
  • Start saving as early as possible.


2. Consider investing & start ASAP

Whether you choose to invest in property, shares, bonds or the like, implementing an investment strategy is a popular means of building wealth to fund private school fees. One of the benefits of investing is its associated freedom as by all means you can start small and still achieve big results, particularly through the magical effects of compounding. The beauty of compound interest will mean that hopefully not only will your money keep in line with inflation but exceed it.

There are several ways that you can invest and the key is ensuring that it is the right option for your circumstances and importantly allows for the release of the funds at the right time. No point having all of your money saved in a structure which you can get the funds out of until your kids are adults! Some of the key options to research and consider are:

Investment Bonds: A big benefit of investment bonds is that when held for over ten years they are not subject to any capital gains tax. Considering that an investment for your child’s future is more than likely going to be a long-term investment (ideally 10 years plus as if no withdrawals are made in the first 10 years any earnings on the bond will be tax free), this can be a great benefit. There are things that need to be considered when looking at starting an investment bond as a way to save for your children. The first is making sure that you’re in it for the long term because there are fees associated with investment bonds so you want to make sure that you’re going to stick it out to get those tax savings. There are also rules associated with them, like the 125% rule which means that you can only put in 125% of what you contributed the previous year. If you break this the ten year period starts again.

Shares & Exchange Traded Funds (ETF’s): This is quite a common one that parents use when trying to save for kids. The issue with this is that there can be tax implications for the parents and sometimes the portfolio might not have the diversification that a good portfolio should have. When looking to build a portfolio of shares you want at least 10 different shares to achieve some diversification within the portfolio, with the type of funds that you might be looking to invest for your children this could mean a small amount in each share and that means that brokerage can become a decent chunk of the investment amount in each share. Alternatively using ETFs is a simple way to achieve the diversification but still being able to purchase and trade these in your share trading account.

High Interest Savings Accounts: This can be an easy way to do an investment for children and is something that quite a lot of banks offer and it can be easy to set up. It is important to shop around though and make sure you are getting the best rate and even if you do have the best rate you may feel like this is quite low because of the interest rate environment that we are in. That’s why if you’re someone who has the tolerance for some level of risk when it comes to investing, other options could ultimately mean a better end result.

Tips:

  • As with any investment that you are about to start, it’s not so much about what you start with but what you are able to contribute to it ongoing to enhance the compounding effects. You can start small and still achieve big outcomes.
  • Contribute on an ongoing basis and then start to turn the tap on later down the track when you need money.
  • Understand your long term capital requirements and work backwards from there to establish how much you need to contribute each month in order to reach your goal.
  • If your timeframe is more than 5 years, consider allocating a portion of your investment towards growth assets.



3. Plan for the unexpected

People in general often put off estate planning and personal insurances until their later stages in life, but the reality is no one can predict when they are going to die and this is why it’s important to address now (not later!), especially when you have financial dependants. It should be considered financial hygiene and whilst not a fun or exciting prospect is just a part of financial adulting. You don’t want to risk the education plans you had or your children, but not putting in place an appropriate “Plan B” should the unexpected happen.

Tips:

  • If your estate planning hasn’t been reviewed since you have had kids, then it needs to be looked at. There are several factors which have probably not been considered including guardianship issues. So see a professional and get the appropriate plan in place including a will and power of attorneys. I would steer clear of will kits unless you really have to, as you don’t know what you don’t know and an incorrectly drafted estate plan may have significant unintended consequences.
  • Ensure your levels and types of insurance factor in the financial requirements of your family including future education costs.

 

So where to next? 

While there are many options to help ease the burden of private school education costs, the complexity of strategic financial planning cannot be overlooked. In most cases, families greatly benefit from seeking out the expertise of a financial adviser to help guide their decisions and make the most of their finances, without having to drastically modify their lifestyle.

As always, if you have any questions or wish to discuss budgeting for your children’s private school education, please feel free to contact me at pete@pekada.com.au.

Post contributor:

Pete Pennicott | Principal Adviser


References:

IBIS World - Private Schools - Australia Market Research Report - April 2019

 Budget Direct - https://www.budgetdirect.com.au/blog/the-cost-of-raising-a-child-in-australia.html

Wealth Collective trading as Pekada (ABN 95 624 612 684), corporate authorised representative (CAR), number 1263725, is authorised to provide financial services on behalf of Communitas Wealth Pty Ltd.

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