WHEN WE PARENTS think about the future, and particularly about financial matters, we get a nervous twitch when it comes to educating our children. I work as a professional financial planner and I see this every day, so I’m not alone.
The notion that third level, and even second level, education is free is wide of the mark. There can be societal pressure on us to consider fee paying secondary schools, certainly in Dublin, and when it comes to third level, even having a relevant college nearby might not work for our family if a particular course is only available elsewhere.
So we get the twitch. Part of my day to day discourse with clients involves asking difficult questions and making people feel uncomfortable (because anything to do with foregoing current consumption makes people uncomfortable).
When I ask how they plan to pay for the education costs for their little dears, they shift in their seats and say that they really don’t know.
Start planning now
Let’s do a quick budgeting exercise for third level costs.
In 15 years’ time our darling student might need to move from the family home to go to college, so we conservatively estimate about €12,000 per year in costs (room rental, some fees, laptop etc.) at that stage.
Throw in the cost of a course itself if full payment of fees ever comes back, and we are looking at a much bigger number. For most families, funding €12,000 per year (for just one child, remember!) from after tax income is extremely challenging.
However, saving money from when that child is born can greatly alleviate this financial stress. Parenting can bring us out in a sweat at the best of times; we don’t need anything adding to that!
Time and compound interest are the great helpers here. As Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
So, by investing small amounts in some sort of medium risk investment account, and re-investing all the returns and dividends over time, one can build up a substantial fund.
To give this saving malarkey some context, let’s take the average cost of a coffee on your local high street and assume you consume three of these a week. Foregoing that alone, and investing the money over 18 years from the birth of your child would give you an estimated €15,000 by the time they go to college! (This assumes a 5% rate of return).
Over such a long time frame, investing, rather than saving in a deposit account, is a logical thing to do for our families. Logical, because investing small amounts in what are called “real assets” on a regular basis over a long term has nearly always outperformed a deposit account when any meaningful academic study is reviewed.
Sacrificing your latté
Real assets can be shares, funds of shares, bonds or property. If I’m going to sacrifice my latté, I want to get some bang for my buck!
Of course, when we have small children and are working day to day, we are time poor. So when it comes to investing money into something for my kids, we want the product to be time efficient, as well as tax efficient. There are a number of ways to skin this cat, but my advice: find something that suits you, your attitude to risk, and your preferences.
You can go low fees, low advisor involvement on the internet, or pay a bit more if you want personal advice. I believe in the value of advice because it’s my game, but each to their own.
Either way, design a well thought out investment plan from the start and try and stick to it. Don’t jump around – jumping from frying pans and into fires is one of the most common problems for investors and is a great way to lose money over time!
When it comes to tax efficiency, unfortunately there is no tax relief available on what you save or invest each month. However, if you put the money into something like a unit linked savings account, your money benefits from what we call “gross roll up” relief, which means that all of the investment returns in the account roll up free of tax for eight years. Einstein would surely approve.
So, enough of this financial planning for now. Back to your day, and the next time you get a spare minute (remember those days?), try and work out a plan to make those expensive education years a bit more manageable.
Eamon Dwyer CFP is Managing Director with City Life Wealth Advisors, a Cork based advisory practice.
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