The 8th wonder of the world could pay for your kid’s education
When my daughter was born, I remember holding her in my arms for the first time and imagining everything she could become. Was I holding a future doctor, lawyer, dancer or even the next Princess of Buckingham Palace? Reality has shown us that anything is possible, but as a responsible parent I wasn’t leaving anything to chance.
It’s common knowledge that a good education is one of the most valuable gifts we can give our children – it gives them fantastic career options and opens up a world of opportunities. It is also common knowledge, however, that a good education is expensive, and all the blogs I have read about this just freak me out!
Public schools cost on average R20,000 per year for primary schooling and around R40,000 for high school. Private schools can cost from R70,000 per year for primary schooling up to R140,000 for high school. Not to mention the costs of university degrees, with a 3-year BA ranging from R200,000 to R500,000, depending on the university. Then you’ve also got inflation to worry about!
At this point, in a wildly panicked state picturing my poor baby girl without an education, from somewhere in the deep recesses of my mind I recalled something I myself had learned at high school. Some call it the “8th wonder of the world”, but it usually goes by its everyday name, “the power of compound interest”.
Now I know what you’re thinking, “Ya, ya, start saving now, your investment will grow over time bla bla bla” Yes that’s exactly it, but I don’t think you’ve understood the true power of compound interest. When I looked at the actual numbers, I was blown away. It gave me comfort and a sense of hope that if I can just put away something every month, over time I would be able to build up a sizable education fund for my daughter.
So here are the details: guess how much you will have saved up if you invest R1,000 per month over 15 years, and earn a 10% return per annum? That’s R180,00 invested in total, but with a compound return of 10% you’ll have approximately R400,000 saved up after 15 years. That’s more than double the amount invested. If the compound return you achieve is 15%, you’ll have just over R600,000 saved up, more than triple the amount you invested!
Now you might be thinking, “15% return, where on earth can I achieve that?” You don’t have to look much further than our own Johannesburg Stock Exchange (JSE). From 1974 to 2017, the JSE achieved an incredible 17.6% annualized average return. Now of course in some years the return was negative, and in others well above 20%, but the point is that in the long run these average out to great returns.
Another way of looking at compound returns that blew my mind was this: consider three friends, John, Jenny and James. Each invested R1000 per month for 5 years i.e. a total of R60,000, except John invested for 5 years, then let his investment grow for 10 more years. Jenny waited 5 years, then invested for 5 years and then let her investment grow for 5 years. James waited 10 years then only invested for 5 years. And let’s assume they all earned a 10% return per annum.
As you can see, the difference in resultant savings pots is quite something! R200k versus R77k, even though the amount invested was the same R60,000, with the only difference being the timing. John started much earlier with his investment and let it grow over time.
What’s the moral of the story: start saving early! Your kids (and you) will thank you for it one day.
So as a next step, figure out which school you would like your child to attend from birth and how much it will cost you in the long run considering education inflation and hidden costs.
Consider how long can you save for, how regularly you want to put money aside and the ideal vehicle to use as part of your savings plan. You essentially have three options: unit trusts, a tax-free savings account or an education policy. If you invest in a tax-free account or a unit trust, should you run into difficulties you can simply stop your debit order and restart it again when you can afford to do so. You also have the flexibility to make lumpsum or regular contributions and there are no minimum investment horizons. This is not the case with education policies. These are typically endowment policies and monthly installments must be paid for a fixed period and the minimum investment term is usually about 5 years but in the event of death or disability of the policy holder, many policies offer to pay your remaining premiums. A financial advisor can help you figure out the best education plan for you.
Don’t wait for the perfect moment, start saving today and remember to evaluate your investment every year in case of unforeseen circumstances.
CompariSure is running a competition to help you kick start your savings plan. Get a quote with us and you could win R20,000 towards your child’s education and tomorrow your children will thank you for who they are.