Educating The Kids How Much Does It Cost?
“I wonder if my kids will get a massive scholarship?” OK, after we are past that lets ackowledge that kids at any age are expensive. Given we know it’s coming, why do so many of us leave funding that thundering expense until it actually hits?
Private school fees can be above $25,000 a year. But let’s assume $10,000. Times two kids. Times six years each. That’s $120,000 in today’s money for secondary school.
If the kids are two years apart, there are four years where you’ve got to find $20,000 a year and four years where you need to find $10,000 (ignoring inflation). Ok so the numbers For example, saving a straight $6000 a year for 20 years, from the birth of the first child till the end of year 12 for the second – ignoring compounding returns and inflation – will get you there.
But more importantly, what do you do with that money? Here are the main options.
One of the easiest and most tax-effective ways is to put the extra money into your mortgage (in an offset or redraw account) and then redraw it when required.
The advantage of this is a guaranteed, tax-free, return of whatever interest rate you’re paying on your home. If the average home loan interest rate now is around 6.75 per cent, high-income earners earn an effective pre-tax return of 12.61 per cent. For average-income earners, the effective pre-tax return is still 10.98 per cent.
The big risk here is “trust”. Can you trust yourself not to dig into the money? If you don’t have a good record there, this could be difficult to manage.
High interest accounts
For renters, high-interest accounts can be a good option. But note the following:
First, you’ll have to pay tax on any interest earned, so put the account in the name of the lower-earning spouse. Second, you’ll need to chase the best rates every few months, as many providers reduce your rate after a honeymoon period.
These products have a few restrictions, but can make good sense for higher-income earners, as they are tax-paid at 30 per cent inside the fund.
You can’t put in more than 125 per cent of your previous year’s contribution and there’s a minimum of 10 years to get the full tax-paid benefits. An upside is that you don’t have ready access to the money.
Education savings plans
These are education-specific bonds that can have some particularly attractive tax benefits, if the money is used for education purposes. But be aware that some have serious restrictions on what the money can be used for. Read the fine print.
This can take the form of either managed funds or directly held shares. It comes with much greater flexibility, but if you’re not using an adviser, you’ll need to take responsibility for the investments.
Buying direct shares is relatively cheap, but requires regular supervision, while managed funds will take most of the supervision headaches away for a fee.