How to Pay for Your Child’s Education in South Africa
Education is a critical part of a child’s life. However, its high cost can be a problem for many households.
Studies show that around 55% of South Africans are lacking enough savings to fund their children’s education. As if this isn’t a problem enough, the cost of a year of education in public schools is also expected to increase by more than threefold by 2035; private schools will cost more and could reach as high as four times the current rate.
With these facts and projections, how can you pay for your child’s education? Thankfully, there are several ways to overcome financial challenges and secure a bright future for your child’s schooling.
How to Prepare Financially for Your Child’s Future
Here are the investment options that many South Africans prefer in saving for their child’s education:
1) Education Plans
The biggest South African banks offer educational plans with different perks and requirements.
Educational plans will require a minimum monthly contribution that’s very affordable for the majority of South Africans. Some plans also give out yearly bonuses, while some have a holiday benefit that can help you maintain the plan even when you’re not depositing money in it.
However, failing to complete the full term may cause penalties. Aside from this capital gains made from educational policies are taxed at 30%.
2) Tax-Free Savings Account
Tax-free savings accounts (TFSA) can be used to compound your savings while saving on taxes. With a TFSA, you can put up to R33 000 in an account per year, and gains from it won’t be taxed.
You can put money into your TFSA until you reach the R500 000 lifetime limit, which will take around 15 years. By this time, your child would be in college, and you’ll have enough money to fund their education. If you’re not sure where to start, here is a list of the top tax-free savings account available in South Africa.
3) Unit Trusts
Many financial experts agree that investing in a unit trust is one of the best ways to prepare for your child’s education. One of the main reasons for this is that the returns of unit trusts are generally bigger compared to an ordinary savings account.
The returns on unit trusts aren’t guaranteed, but you can choose from the different risk profiles suitable to your investment objectives.
South Africans are given a tax exemption on their unit trusts for the first R23 800 they earn from interest annually. Exemptions like this mean a lot in saving more money in the long run.
Educational policies offer a combination of guaranteed and non-guaranteed gains on your investment. They’re less risky to invest in for your child’s education, but the returns are also relatively smaller. On the other hand, unit trusts and other investment vehicles offer possible higher returns in exchange for higher risks of losing money.
Your risk tolerance and financial targets will help you decide which of these investment choices will work best for funding your child’s education.
Tips on Paying for Your Child’s Education
To help you manage your finances better in saving for your child’s education, remember these points:
1) Start early
As soon as the child is born, you must start saving for their education. Better yet, you can start saving before your children are even born.
By saving R1 000 every month, you can grow your account to a considerable amount that can pay for your child’s tuition. Whether it’s R1 000 or R100, the important thing to remember is to start early and consistently put money in your child’s education fund.
2) Create a budget for it
Your child’s education should also have an allocation in your monthly or annual budget for savings and expenses. Make it a part of your investment goals and ensure to stick to putting a portion of your income into it.
3) Increase your income
Your other expenses may take a hit when you start allocating money into a separate account for your child’s education. But you don’t have to sacrifice travel and entertainment if you can find a way to increase your household income.
Increasing your income helps avoid budgeting constraints. You’ll also reach your financial targets faster when you’re bringing more money into the household.
4) Avoid getting into debt
If you’re already in debt, you’ll have to practice better money management skills to juggle between repaying the loans and putting money into your child’s educational fund.
If you’re just planning to apply for a loan, it’s better to think twice and check again if you can handle all the financial obligations. Failing to do so will put you in a tight situation where you’ll have to choose between your child’s future and loan repayments.
5) Look for the best rates
Compare different education plans, unit trusts, and other financial instruments to identify which of them will get you to your targets faster and easier. Don’t simply stick to a bank or the usual savings account because that’s what you’re familiar with. Learn about other investment options and research on what the other financial institutions have to offer.
6) Teach your child about delayed gratification
Instead of giving gifts to your children on special occasions, try putting the money into their educational savings account. You can also instruct friends and family members to do the same to grow the fund faster.
Your child will surely protest at first, but this is the time to teach them about delayed gratification. They’ll appreciate it if you explain to them where all the savings are for.
7) Consider the associated costs
When it comes to your child’s education, you should consider other factors that need a budget aside from the tuition. There’s the cost of transportation, meals, allowances, and extracurricular activities. There are also factors like inflation and fee increases that you can’t precisely determine now.
The point is that it’s not enough to plan for paying the future tuition alone as there are other expenses to consider when it comes to your child’s education. It’s always safer to save more than the anticipated cost than regret not having enough to pay your child’s needs.
All the methods and tips discussed here on how to pay for your child’s education revolve around saving money early and reaping its rewards later. There are several options for investing in your child’s future and each one carries a certain amount of risk.
Saving for your child’s education can be as costly as getting a vehicle loan. But your child’s education is incomparably invaluable compared to a vehicle or any other asset, so there’s no question on which should take priority.
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