The cost of raising and educating a child is growing — fast.
According to NATSEM, for example, the cost of raising a child rose 50% between 2007 and 2012 while incomes rose just 25%.
It gets better.
A child born in 2014 cost $63,000 to educate in a public school while private education cost around $500,000 per kid. Chuck in clothing, shoes, pens, ipads, excursions and — the big one — university. It adds up.
But you are not reading this article for me to throw some daunting stats at you — you already know it's expensive. Here are five practical solutions:
- Start an investment fund at birth. When your child is born, start investing in shares. DON'T put it in their name if the fund is large because if the fund earns over $1,307 per year they will pay 47% in tax. Ouch!
Start it in your name, or the parent with the lowest marginal tax rate. It's a pretty simple strategy but the numbers are huge. Starting with $500 (the minimum required to buy shares) and adding $25 per week will turn into more than $20,000 by age 10, assuming a 9% return. That won't cover everything for a public schooled child, but it's better than nothing. You could buy shares in companies like Wesfarmers (ASX: WES) (owner of Officeworks), JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) which are capitalising on the rising costs of educating a child.
- Consider public school. Public schools are much cheaper. But the arguments for private schooling do not hold for every student. Catholic schools (you don't have to be religious) offer a middle ground. More on this below.
- Make your mortgage work for you. A mortgage offset account allows you to add money to a bank account and in essence it will offset the amount owing on your mortgage so you pay less interest. Talk to your bank. They have minimal costs to set up but like the first option require you to be sensible and not spend the money. However, they have one added benefit aside from interest savings: tax effectiveness.
- My favourite strategy. Consider investment bonds (a.k.a 'insurance bonds'). Outside of superannuation you won't find a more tax effective solution for long-term investments. An investment bond is exempt from tax if it is held for 10 years or more. Basically, you buy a bond with $2,500 and it is administered by companies such as Lifeplan (owned by Australian Unity) and Austock Group Limited (ASX: ACK). You can then choose to invest that $2,500 in funds run by the likes of Magellan or Vanguard. You can add up to 125% of its value per year and it does not affect your personal income. Best of all: after 10 years it is tax-free.
- Another great idea. The Lifeplan Education Bond is a product designed to capture the benefits of an investment bond but is arguably more flexible. You can withdraw the contributed amount at any time and the earnings inside the bond can be used to cover many educational related expenses of the student — with a tax refund. Heck, it can even cover things like part of the costs of students living away from home. It's a little confusing but a very worthy product to consider.
Foolish Takeaway
Securing your family's financial future is the second most important task in life after being fit and healthy, in my opinion. We all want the best for our kids. To get the best, you need to save and invest wisely.
Consider if private school is right for your children, while some (not all) evidence says private schooling excels children academically — there are many arguments against it. Moreover, the value proposition is not in favour of it.
Want a better strategy?
Why not take the difference between private and public schooling (~$400,000), get a tutor for four hours per week, invest the rest in an investment bond and for their future. Teach them about money and I'd be willing to bet they will do very well. As an added bonus, a school with a principal earning $600,000 per year won't be breathing down your neck for late fees.
I know what I'll be doing.
