It's no secret that education will be expensive, and father of two and Count Financial’s Senior Executive Dean Bornor says "your kids' education could end up being the biggest expense after your mortgage, so early planning is crucial”.

The ABCs: Getting started

Starting early and even starting with a small amount, like part of the Federal Government Maternity Payment, could be one option of securing a better future for your children's education. But according to the Australia Institute survey of parents, only 11% said they put away payments into an investment for their children.
Those parents who do invest, including Dean, look at managed funds and other investments to budget for their children's' future.

Count Financial’s own ‘baby bonus’ plan offers staff 10,000 share options per baby born (to staff who have been with the company for longer than one year), which came out of the belief that the Government’s Maternity Payment just wasn’t enough to financially prepare for children in the long term. Dean explains, "for many people, the best part of investing is the ‘compounding,’ which means that you earn interest on the interest, as well on whatever you put in, so the more you put in, the faster and more you earn over time, and this extra income can act as a good financial reinforcement for many parents”.

Managed Funds

Investing directly in shares can be effective, but if you have kids then it might be difficult to find the time needed to look after the paperwork. Alternatively, a managed fund is a combination of your money and other investors' money pooled together. It can be another way of investing, but without a lot of the hard work and administration.

Fortunately, you don't have to start with a lot. A good plan is to start with $1,000 and then build up with regular deposits over time, say, a small amount each month. And the best part, the longer you have the managed fund, the more you earn, giving you an efficient method of creating income or saving long-term for your child's education. Benefits of compounding interest in a managed fund.

The graph shows an initial investment of $10,000 into a diversified fund, earning 7% (4.9% income and 2.1% capital growth) and assuming net earnings are reinvested into the fund. Dean warns that while managed funds might be a good way to prepare for education costs the income earned by minors is taxed at very high rates. Usually if you have the investment in your name instead of your child’s these rates can be avoided. A financial adviser can provide more specific advice.

Shares

A portfolio of direct shares can also be an effective long-term wealth creation tool for your child, but again, you need to consider the tax implications.. Despite the high tax rates children incur, children’s earnings are still eligible for tax benefits known as ‘imputation credits’ or ‘franking credits.’ This just means that Australian residents, who receive income from an Australianbased company, such as through interest earned on shares, can often benefit from tax-offsets, which can be added to your budget as additional income.

Investment Bonds

Another investment option is an ‘Investment bond.’ Even with as little as $500 to start, a plan can be set up to contribute regular amounts over time.

Dean says that if the investment bond is held for 10 years or more, the earnings on the investment are only charged a flat 30% tax, instead of normal children's tax rates, which can be up as high as 66%. Dean adds, "Because this tends to be a long-term savings plan, you can even teach your children about saving and compounding as they grow up”.

Education Savings Funds

In the past, education savings funds have been popular, but have been known to have drawbacks, such as paying out less if your child does not attend TAFE or university. Also, high fees and slow savings growth have driven people to other more efficient and more flexible investment options. 

Testamentary Trusts

Consider a testamentary trust to distribute your savings to children. In many cases, a trust can avoid the high child tax rates, and your ‘trustee’ is legally obliged to act in the best interests of your children (or other beneficiaries) so the money could help pay for their education, at whatever stage of school.

Dean adds, “This could be a good idea to consider if you wanted to help with children’s expenses in the future, and especially since many grandparents help out with the cost of education, it’s worth thinking about now”.
Discuss your situation with your financial adviser and see if a trust is suitable for you.

Looking ahead

Planning for your children’s education might need more than checking your account balance. Would you still be able to pay the school fees if you were suddenly left without an income? In the case of an accident or emergency, wealth protection insurance could help you keep up with the costs and secure your children’s education.

Take action now to save later

Start thinking about your goals, and budget sooner rather than later for a financially happy ending. No matter what stage of education, if you’re worried about the expenses, or the impact it will have on your future and your children’s future, talk to a financial adviser as soon as possible.

Important steps to consider for your child’s education:

• If one parent ceases employment work out a single-income budget;

• Invest on a regular basis and as soon as possible to benefit from compounding;

• Speak to your financial adviser about family or child tax benefits;

• Update your insurance to include your children and consider their education needs going forward; and

• Find out from the school whether you can pay fees ahead of time, this could mean avoiding price hikes down the line.
 

Dean Bornor is Technical Services Manager at Count Financial Limited, Australia's largest independently owned network of financial planning accountants and advisers.

From count.com.au -media release – "Parents do homework on ‘back-to-school’ costs", 17 January 2008  

Link:

www.count.com.au

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