Highlights in this issue:

*** The magic ingredient to meeting your child’s education needs…
*** Discover how to add the "most powerful force in the universe" to your savings strategy…
*** 6 vital factors to help you select the best fund out there…

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From the pen of Karin Iten…

Dear Investment Academy Reader,
 
If you have young children (or are considering having kids), you’re probably more concerned about the cost of nappies than the price of education right now. But, did you realise the 16 years of schooling and university your child requires will set you back almost R1m?

And that’s without the added costs of boarding, school uniforms and even textbooks. Add these costs, and this estimate shoots up another 10% or so. The mere thought is likely to leave you gasping for air.

That’s why experts such as Clive Cotton, a chartered accountant, believe you should start planning for your child’s future as soon as “you’ve paid the bill from the maternity clinic,” reports the Business Times. But even if you haven't the sooner you start, the easier it’ll be to save enough to cater for your child’s tuition.

And to do this, you need to stick to four basic investment rules...

Rule #1: Invest to beat inflation

Education is so pricey that yearly increases in fees have surpassed the average inflation rate by at least 1.5%. And that means saving for your child’s future is no longer just a matter of ensuring you can afford to send him or her to university, reports personal finance journalist Neesa Moodly-Isaacs. That’s why, no matter how you choose to come up with the money, you need to make sure your savings plan beats inflation.

Rule #2: Don’t forget about the magic of compounding

Einstein once declared compounding “the most powerful force in the universe”. And he was right. Similar to retirement planning, saving for education involves a long-term investment horizon.

So stop trying to beat the market and rely on the compounding effect of frequent reinvestment and interest instead. The longer you save, the more interest you’ll earn. Let’s have a look at an example:

Let’s say you invest a lump sum of R10,000 when your child is born. By the time he/she is 15, there’ll be R27,590 in the kitty (provided you receive a compounded interest rate of 7% each year). That’s not bad. But now consider the following: If you add an extra R1,000 to this investment each year, the amount will almost double to R54,478.37. And this takes us to my next rule…

Rule #3: Set up a recurring deposit

If you invest over a long period (for example, your child is two, and you have 16 years to plan for his/her university fees), you don’t have to commit a huge amount of savings to the education plan right from the start. But what you must do is invest regularly and without fail.

To work out how much money you need to invest each month, visit www.financialsense.co.za and click on educational calculator. Once you know how much you need to pay each month, set up a debit order to ensure you’re putting this amount away.

Rule #4: Plan ahead

Wealth Corporation MD Nigel Scott believes you should factor education funding into your holistic financial plan. “Education is a critical part of setting up financial objectives, apart from paying off debt and retirement. It is one of the most significant targets, but shouldn't be compartmentalised and financed separately.”

He believes time horizons play an important role in planning. If you, for example, can afford to pay school fees from your monthly cash flow, factor this into your budget. It’ll also mean you have 12 years to build up the cash to pay off your child’s varsity tuition.

The single best vehicle for investing in your child’s future:

Provided you have the discipline not to cash it in, financial experts agree: Unit trusts are the best savings vehicle for long-term goals like education.

According to Spalding Fourie, a specialist planner for FNB Investment Product House, if you have enough time to save for your children’s studies (say ten to 18 years) you can afford to ride out market volatility. As such, a general equity unit trust or targeted absolute and real return fund with an inflation-linked mandate is a great way to save the money you need.

But don't just park your money in a fund and leave it. Review the performance of the fund every year and make adjustments as and when necessary. When your child is five years away from starting varsity, consider shifting your money into growth and income share funds. This will reduce your exposure to market ups and downs while still allowing you to aim for high returns.

6 vital factors to help you select the best fund out there

The fund you select will largely depends on the following six factors:

1. The capital you require to fund your child’s tuition. (Sites like www.financialsense.co.za will help you calculate this.)
2. How much money you have available to save.
3. The term of the investment (or how long you’ll invest in the fund).
4. The fund’s portfolio mandate. (This determines what type of shares the fund manager may invest in and what percentage this type of investment can cover. For example, some funds have higher risk mandates than others and, as such, they invest more heavily in mining and commodity shares than other funds do.)
5. The expected rate of inflation over the investment period.
6. And your risk profile. (How soon you need the money will determine how much risk you’ll be comfortable with.)
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Here’s to your financial freedom,

Karin Iten
For the Investment Academy