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Budgeting for private school: 6 things to think about

Rebecca Hurford | ANZ Financial Adviser 

Article | March 2021 | 6-minute read

With tuition fees on the rise, the earlier a family prepares for private schooling fees, as well as associated extras, is crucial to avoid financial disruptions.

When planning for kids, it can be easy to focus on the baby stage - preparing for long nights, changing nappies and having enough onesies to see your baby through those early years. While most families decide on their preferred method of schooling before the baby arrives, it is also important to understand that educating your kids in the private system is a long-term investment.

I have worked as an adviser for over 20 years but I’m also a mum, who planned long and hard to have our first child. Many people who see me for the first time, may not have thought about setting up financial plans for a planned cost still potentially five, six or even 12 years away. With tuition fees on the rise, the earlier the family prepares for private schooling fees, as well as associated extras, is crucial to avoid financial disruptions.

Across Australia, some private schools charge between $10,000 to $40,000 per year for tuition, varying dramatically between metro and regional areas, but regardless families can be looking at an investment of $450,000 per child from kindergarten through to Year 12. Over a 13-year period a family’s circumstances can change or more kids could come into the family increasing annual costs. A contingency plan is key to protect and stabilise family finances no matter the journey your children take through school age.

Once your family has considered the total cost of your child’s school and how best to access the funds for this, the next step is to consider the investment options open to you. With so many options available it's important to seek professional advice for the best investment to suit your individual needs.

Here I share my insights into how to plan now for investing in your children’s education, and why it’s important to start the conversation today. I'll also be exploring some of the advantages and disadvantages of different investment options from Exchange-Traded Funds (ETFs), investment bonds, to bank deposits and mortgage offset accounts.

1. Get started

Ideally, the decision about privately educating your children is agreed upon ahead of your baby’s birth, to ensure there is ample time ahead of school age to put financial plans in place securely.

Researching your preferred school is key. Understanding prospective costs can help guide your investments ahead of time, though tuition cost isn’t the only thing to consider. Making sure to review school culture, policies and teaching approaches may help mitigate any last minute changes in school should it be the wrong fit for you and your family, helping to make planned expenses more accurate.

2. Set a foundation

Like all financial goals, there is no such thing as too early to start saving. Commencing an education nest egg can even begin before you are ready to have kids. Financially planning as far in advance as possible is key to achieving financial security should unforeseen costs arise.

3. Build the nest egg 

Understanding where the savings will come from is something you can speak with your financial adviser about, because everyone’s circumstances are different. For some, setting aside a percentage of their wages each week is a good place to start, for others setting aside already established personal savings works for them.

There are also options to invest, especially if you have a timeframe of more than five years ahead of needing the funds. A professional financial adviser can help you by recommending investments that will reflect your life goals, including education goals for your children.

Bringing your financial adviser in on family plans, private school preferences and associated costs will enable your adviser to provide you with insight and advice, which will enable you to make good decisions.  

4. Choose your investment vehicle 

Exchange Traded Funds (ETFs) and managed funds

ETFs and managed funds are both popular options when saving for your children’s future education. They are both a form of pooled investments, managed on behalf of investors by a professional fund manager.  A key difference is ETFs are listed - to buy and sell on the stock exchange. Whilst managed funds are unlisted – these are bought and sold directly with the fund manager.

Depending on the asset allocation and investment approach chosen, long-term returns from ETFs and managed funds have the potential to significantly outperform current bank deposit rates. An important consideration, is that managed funds and ETFs can be exposed to higher risk investments, like shares, and so there is the potential for short-term fluctuations in the value of the investment.  

Both ETFs and managed funds have similar tax treatment and benefits, and it’s important to structure an investment appropriately to minimise capital gains tax (CGT) where possible. When investing in this type of fund, it’s worth considering the ownership structure for tax purposes. Income and capital gains are taxed at individual rates, which means if one person is earning more than another within your family or partnership, it may be beneficial to place the fund under the lower earner’s name.

Investment bonds, bank deposits and debt/offset accounts

Generally, investment bonds can invest similarly to managed funds, but they differ in their tax treatment - they are taxed internally at the company tax rate rather than individual rate, allowing some investors the opportunity to save tax. Also, once the bond has been held for more than 10 years, no CGT is incurred by the investor resulting in less tax that needs to be paid.

If neither ETFs nor investment bonds are right for you, other options include bank deposits or mortgage offset accounts.

Bank deposits can provide a stable and low risk investment and can be considered a safe option when deciding on a way to invest. An important consideration is that current term deposit rates may only generate interest of 0.05% to 0.3% pa in current environment. They also offer no opportunity for capital growth or tax benefits so lack some of the benefits that other options offer.

Another alternative to consider is making extra repayments into your home loan or a mortgage offset account. It allows you to reduce your home loan interest costs and also save for future education costs at the same time. This has been a good option to consider in the past, however the current low interest rate environment potentially reduces the benefits.

Flexibility

It can be difficult to know whether saving for your child’s private education is the right decision, especially when they’re still young. Every child has different strengths and interests.   Flexibility is an important consideration, which not all investments offer. Education bonds, for example, have restrictions on the types of expenses which can be paid for with the bond proceeds - potentially locking you in to education costs.

Unlike education bonds, the earnings made from ETFs and managed funds can be used in other ways if private school education is no longer the right decision for your child. These funds can then be used to invest in your child’s future in other ways, perhaps you could redirect these savings towards your child’s first car or help them with a deposit for their first home.

5. Plan B is also important 

Relying on plan A and setting it up to work, is important - but having a plan B is crucial when it comes to protecting your family from unexpected curveballs.

For example, our family planned for kids for years with the best intentions, but it wasn’t until struggling through expensive rounds of IVF that we succeeded in meeting our son. Understanding that life doesn’t always go the way you plan also applies to your investments, and any saving plans you may have.

Having a plan B is the best way to mitigate unforeseen expenses or changes in your circumstances.  If a sudden illness or injury prevents us from being able to earn an income (plus adds extra medical costs to our household budget), are we going to be forced to dip into our children’s education fund to meet the shortfall?  A comfortable financial safety-net (like income protection and other insurances) can provide the peace of mind we’ll still have money coming into our household to pay for these bills – and importantly, ensures we don’t need to disrupt our children’s lives due to an inability to pay for their private education. 

6. Seek unique advice that reflects your financial goals 

Everyone’s circumstances are different, and what works for one family may not work for another. Having a clear idea of your financial goals and preferred route for educating your children ahead of time is a good place to start when requesting financial advice. The more personalised your investment partner can be, the better your goals are tailored to your needs.

Even if your plans change, your financial adviser can help you to understand your options, and to provide the insight and advice to enable you to make good decisions.

ANZ's Financial Advisers can work with you to develop a plan as unique as you are to build your wealth. At ANZ, we are committed to helping Australians achieve their life goals and improve their financial wellbeing. Find out more and book an appointment

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This information is of a general nature and has been prepared without taking account of your personal objectives, financial situation or needs. Before acting on the information, you should consider whether the information is appropriate for you having regard to your objectives, financial situation and needs.

Taxation laws are complex and their application may vary according to investors’ specific circumstances. ANZ recommends you seek your own independent tax advice to address your personal circumstances.

Rebecca Hurford is an ANZ Financial Adviser. ANZ Financial Advisers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522, holder of an Australian Financial Services licence.

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