Everyone knows that children can be expensive. From nappies, to clothes, a new bike and the constant food consumption. One of the biggest expenses can be their education. Although investing in your children through their education is one of the most rewarding things you can do with your money, it can start to add up. Here are some tips on how to save for your child’s education.
Start planning early
Start planning your child’s education funding right after you start planning to have the child. The sooner you start, the easier it will be to make small contributions and let compounding do the hard work for you. If you want $30,000 to help cover the cost of university, by starting at birth you only need to put away a little over $2 a day until they turn 18. If you do not start until they reach high school, you will need to save $10 each day to make the $30,000 target.
Compounding is the seventh wonder of the world
Compounding interest is your friend. If you invest $1000 at 6% when your child is born, and add an extra $1000 each year until they turn 18, you would have $33,000, but only $18,000 of this would be your money, the rest comes from compound interest. The more you can add at the start and the longer you save for, the greater the effect of compound interest.
Be systematic and automated
Don’t empty your coins out into a jar each evening or put away $50 here and there. Use online banking to create regular automatic transfers to a separate account. This way you will never forget to contribute or be tempted to ‘borrow’ some coins for an ice cream.
Not with the education you provide but with the fees you pay. If you follow the advice from above by investing $1000 each year at 6% for your child until they are 18 but pay a 2% in management fee you will end up paying $6500 in fees! Basic index funds and exchange traded funds generally only have management fees of around 0.2% – 0.5%, which means you can spend more on your child’s education and less on an investment manager’s yacht.
Even more important than saving money for your child’s education is educating your child on how to save. Regardless of what path they take in life having the skills to manage their own finances will help them enjoy a richer life.