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Top tips for planning for your kids’ education

| by Tim Mackay, CFP®

Every parent wants to do the very best for their children, and for many giving them the best education possible can be a high priority. However, if you don’t have enough money to support your lifestyle, pay off your mortgage and save for your retirement, it may be in your family’s best interests not to put aside extra money for their education. Not because you don’t love them, but because you want what’s best for them and your entire family.

“Put simply, you don’t want to be a financial burden on your children in your old age.”

So work out if you can really afford to save for your kids’ education or not. Be realistic with your planning – while inflation sits at less than 3%, education expenses typically rise 7-8% every year. Ensure your household finances are on a steady footing with an emergency reserve before you start planning for education expenses. For young couples, the best strategies you can put in place are adequate insurance and up to date estate planning documents should something happen to you while they are young.

How can you save for your child’s education and what are the pros and cons of each option?

1. Your mortgage

The discipline of structured repayment plan can be the best and most cost effective way to develop and maintain a strong savings habit. Focus with almost religious like zeal to reduce your mortgage to near zero as soon as possible. Shop around for the best rates, keep an eye on fees and use a re-draw facility to fund ongoing education expenses. You can reduce your ‘bad’ (i.e. after tax) debt even faster in this low interest rate environment.

2. Investment portfolio

For those with a longer time frame, a diversified, low cost investment portfolio focused on Exchange Traded Funds can be constructed reasonably easily. Invest the portfolio in the name of the parent who is on the lower tax bracket to optimise your tax, especially if one parent is not in paid employment.

3. Insurance bonds

For those with a longer time frame (10 years plus) on a higher tax bracket, insurance bonds can be an attractive option. They don’t impact your personal tax situation, you can contribute more to the bond each year (within limits) and you can access some (or all) of your funds before maturity should you need to for any purpose (i.e. not just for education expenses). Tax is levied at the corporate rate (30%) by the insurance provider within the bond itself.

4. Education savings plans

While these sound like a purpose driven solution to this problem, you should always be mindful of the relatively high fees (in excess of 1% per annum) embedded into these products. The products are relatively inflexible for use of the funds once you place the investment. Should your circumstances change (such as your child not needing to fund tertiary or private secondary fees or you not being able to afford to continue contributions), you can request a surrender value for your funds but you may lose some of your earnings.

5. Your super

Depending on your age, making additional personal or concessional contributions (such as salary sacrificing) to your super can be an effective way to save in a tax effective environment. However, your money is then locked away and you can’t access it. The additional funds saved for your retirement can mean you can free up cash flow in later years to pay for education expenses.

When should you start saving?

The sooner the better.

“If your child is just a twinkle in your eye or if they have already started school, it’s never too late to start planning and saving and the best time is right now.”

Tim Mackay CFP®
Quantum Financial Services

Tim Mackay, CFP®

Quantum Financial Services
Quantum Financial Services Australia Pty Ltd (AFSL 239200)

Tim Mackay CFP® CA MBA BEc (Hons) is passionate about providing trusted financial planning and SMSF services to his pre-retiree professional and business owner clients. Since 1997 he has held roles at Deutsche Bank, UBS and Quantum Financial in London, New York and Sydney.

He was awarded the National SPAA SMSF Best Practice Award 2013 and the NSW State Excellence in Business Ethics Award (NSW Business Chamber).

Tim appears on ABC TV and writes a column in Charter Magazine. He is regularly quoted by the AFR, Sydney Morning Herald, The Age, The Australian & Money Magazine.

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