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How to invest for your kids’ education

10 May 2017

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

When kids are starting school, will your finances be ready too? You’ll often have many other financial commitments at this time - your mortgage, family holidays, insurance, grocery bills and more. If you think a fee-paying school could be on the cards, how will you cope with another big bill to pay? We talked to CERTIFIED FINANCIAL PLANNER® professional Paul Garner, financial planner and principal at Novo Wealth, about how you can create an investment strategy to prepare yourself for one of your most important financial commitments.

When should you start investing for school fees?

As with any investment, the sooner you start, the better your chances of reaching your financial goal. The amount you’ll need is going to depend on many things, including the fees charged by the school and how much they’re likely to be in the future. Check with the schools you’re considering and they should be able to give you an idea of what you’ll be paying. You also need to consider how many years of education you’re paying for – will you be paying fees from kindergarten or just for high school?

When you have a sum of money in mind and a timeframe for when you’ll need it, you can work backwards to calculate how much you’ll need to save and guide your investment strategy. Time is a really important factor when it comes to reducing risk. When you have an investment window of around ten years, it’s going to give you a different risk-return profile than you would have if you’re looking at investing over four or five years.

How much should you be saving and investing?

Once you have your financial target in mind, you can calculate the sums you’ll need to be investing in the meantime. With clients, we’ll usually begin with the assumption that investments are going to pay the whole amount. Then we can use software to run the numbers and look at the amount they need to contribute and how much different investment strategies are likely to add to that over a period of time.

Faced with the reality of how much you need to be saving from your current cash flow, you may decide to make a more modest contribution and pay some of the fees from your income when the time comes.

What are your best investment options if you’re saving a regular amount towards school fees?

The good news is there are many investment options that can help you reach your goal. Specialised education bonds aren’t the only product you should be looking at, although they do have some advantages for tax-efficiency. And there are other bond products offering the same benefits, they’re just not marketing themselves to parents as a tool for investing for education. With these products you’re committed to investing your funds for a period of time. The returns you get at the end are not liable for tax because tax has already been paid within the fund. What’s important with any bond is to have clarity on how your money is going to be invested and all the costs you’re paying so you can weigh up the risks and potential returns and how big a chunk will go towards paying product fees, taxes etc.

In fact, this is really the bottom line for your decision about making any investment. As an adviser, I’ll be aiming to understand your knowledge and experience of investing to date and guide you through the options. We’ll look at your tax position, how long you’re investing for and the level of risk you’re prepared to tolerate. All this goes towards determining the best options for achieving low cost and tax effective exposure to products that will deliver the level of return you need.

There are lots of funds, platforms and products available, from investing directly in shares with a broker to buying units in a fund that gives you exposure to a number of shares or other asset classes. Another option is to use a platform where you pay a fee to use various funds and investment products that usually require a large sum of money to invest directly. In most cases, you’ll be starting out with a modest investment that you’ll be adding to over time. If you’re adding in larger lump sums along the way – gifts from grandparents or annual bonuses for example – this can have an impact on your initial and ongoing investment strategy and choice of products.

How can I limit the risks that can be involved with investing?

There are risks involved with any kind of investment. It can take a certain type of attitude to take on even a modest level of risk, without it having a big impact on your peace of mind. If you’re going to have trouble sleeping at night because you’re worried about how secure your finances are, you might be better off saving for education through your home loan. As long as you’ve got the discipline to keep the money in redraw and not be tempted to spend it, it’s a risk-free way to save for school fees and save on your mortgage interest at the same time. And it’s certainly more cost-effective than increasing the size of your home loan to meet the cost of school fees, which is what parents often end up doing if they haven’t planned ahead.

Whether you’re investing for education, retirement, or just your overall financial security, a CERTIFIED FINANCIAL PLANNER® professional can help you come up with the right strategy.