Out of the box education plan: How about a 2842% return and a head start for your child?
Exploring alternatives to fund your child's education
Having a child comes with unexpected expenses, such as medical bills, nappies, and other necessities to care for your child. The last natural thing to think of is to start investing in your child's future. Saving for your child's education often gets neglected in the daily rush of life and always thought of the I'll cross that bridge when I get there mentality. Most people don't save for their children's education as finances and lack of planning do not allow for it. We recently wrote a blog on how much should I save for my child's education if you want a tool to calculate how much you need to invest for your child's education.
What if there is another, alternative method to fund your child's tertiary education without you having to pay for it out of your pocket? This method would not be widely marketed as the financial advisor industry does not get remunerated for giving this advice.
Let's look at a few methods to find the best way to save for your child's education.
Conventional saving method: Tax-Free savings account: Tax-free savings accounts were introduced in 2015 to encourage South Africans to save more and enjoy the benefits as can be seen in our blog post about Tax-Free Saving Accounts. The only downside to Tax-Free savings is all the contributions come from your pocket, and this is where the cookie crumbles for most people. If you don't start soon enough and leave the investment long enough, compounding interest can't work its magic.
Alternative education plan: What if you bought a 1 bedroom apartment, using a 5% deposit, and rented it out for 18 years giving your child another means to fund their education? This idea played around in my head so I thought I'd run the numbers for you guys.
To reach the same end goal we use tertiary education cost (a previous blog about education costs in S.A) at R44 035 per year based on the averages in South Africa. For tertiary study costs of R44 035 per year, a payment of R3669.6 per month is required to fund tertiary education from your pocket. Using the Finsesh Education Calculator tells us how much we need to save today to be able to pay for our child's tertiary education for 4 years of study.
Conventional saving method: Tax-Free savings account: After saving R1381,78 per month for 18 years your child starts studying and using the capital, after the 4 years the capital should be depleted leaving the child with new-found knowledge and no capital after paying for their education. Not only that, the R1,057,666 was fully funded from your pocket and the power of compounding interest. Maybe there is a better way to leverage your money.
Alternative education plan: Let's assume you buy a 1 bedroom apartment in a new development, for R800 000 using a 5% deposit. To secure your apartment they will ask for a security deposit of R20 000. Which will later be used towards transfer/bond costs of R25000. Transfer/bond costs plus your 5% deposit (R40000) and initiation fees, make the total money invested from your pocket R65 356. As the investment is positive on cash flow we are not expecting more investment from your pocket. This can vary depending on the investment but the concept remains relative.
As can be seen from the picture below the first year should hopefully break even on cash flow, preventing further outflows from your pocket. Your ROI in the first year will be negative as you invested from your pocket and the return on investment was just sufficient to cover costs. This is the start of the journey of income and capital growth. Once done studying the first graph, we will climb in a time capsule and fast forward 18 years.
We climbed out of a time capsule which took us 18 years ahead after you purchased the property The picture below tells this story:
You are earning a positive cash flow of R6085 per month, which is already sufficient to fund your child's education from your pocket (R3669.6 per month was required as stated above)
Not only is the cash flow positive, but you have also created equity of R1,019,556 for your child.
Notice that you only paid the initial amount of R65 356 from your pocket giving you a return on investment of 2313% in year 18.
We have reached the 20 mark via our time capsule, and we finally own the property outright, thanks to our tenants diligently paying our bond repayments for us.
Your child should be in the second year of tertiary education with a positive cash flow of R13 548 per month and equity of R1,188,758 all from your initial investment of R65 356 giving you a whopping 2842% return on your investment!!
You have a few options:
-You can sell this property and release the equity created.
-You can keep the property, and provide your child with support for their lives.
-They can borrow against the property for future business ventures or property investments.
Due to systematic rules in the advisory community, many people don't get introduced to alternative methods to fund their child's education. If they don't read about it, how would you ever think of this idea? This is not advice, but will hopefully give you a new perspective on the best way to invest in your child's future.
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