12th March 2015
Currently the average cost of a local three-year degree is about R120 000, according to Old Mutual’s research. If current education inflation* of 9% persists, it will cost you more than R560 000 to get your newborn through university 18 years from now. And we are only considering the academic fees here. Residential and living expenses could triple that figure.
To build up the required R560 000 over 18 years, you would need to invest R930 per month in an investment product that beats consumer inflation (6%) by at least 4% per year. The later you start, the more money you will need to put away every month. If earning additional income is not an option for you, prioritise your child’s education by cutting non-essentials wherever you can. For example, do you really need satellite TV at R665 per month?
Increasing your contribution amount every year will make a huge difference. If, for example, you commit to increasing the amount by consumer inflation every year, you need to start out with only R697 per month in your first year, not R930.
If you are investing for a term as long as 18 years, you can afford to take on the volatility (risk) of investing at least some of your savings in equity. The above calculations were made assuming that your investment beats consumer inflation by 4%, which requires equity exposure. But if you invest R697 per month (increasing the amount by consumer inflation every year) in a product that beats consumer inflation by only 1%, you will have a shortfall of more than R130 000 after 18 years. By contrast, if you invested in a fund that beats inflation by 4%, you would have met your goal. Your choice of the right type of portfolio is crucial to your investment success.
Take care when investing through an older-generation education policy, which may have built-in commission or other product costs. If you are investing through a unit trust or newer-generation policy that allows you to choose the underlying funds, keep an eye on the fund manager costs. Fees will drag down investment performance, making it harder for you to reach your goal.
Note: Education inflation is currently 9% and average consumer inflation is around 6%.