Saving for your Kid’s Education

Crown Money, where we show you how to pay your home loan off in up to half the time of a normal bank loan. Welcome to the Crown Money Podcast. I'm Jessie Edge and I'm joined today by General Manager Chelsea Burton and CEO Scott Parry. Hey guys, how you going? Great. Great to have you both here. Today we're going to talk about something that is, you know, a big issue for a lot of families out there and it's saving for their kids education. So this is private high school, which can be a lot of money.

It can be a lot of money. I mean, you can see school fees ranging right up to 50, $100,000 a year in year 12, which is a lot of money. Absolutely.

And especially if you kind of get there and you've got two or three kids in high school at the same time, this is, you know, an immense amount of money. And definitely that's a choice. Like a lot of families, you know, will choose to send their kids to private school, they do have the choice of going to public. But if that's something that they want to do, there's definitely steps that you can take right now to prepare yourself for that cost that will be coming. So I just wanted to chat to you guys about that today and just say, do we have any suggestions, any thoughts on what we can be doing or what our clients can be doing to save for their kids education?

Yeah, I think it's really down to the earlier you start, then the earlier you're going to be in a position to send them to a private school. And I also look at things change and your decision might change and you may not send them to a private school, but if you started early, then you've just got a nice lump sum to be able gift to the children. I mean, I've got a lot of clients who actually have changed their mind and rather than actually send them to a private school, they actually bought them a house with the deposit that they would have put into the private schooling. So when they have finished school, they've then given them the house as a gift and they feel that's a better leg up than sending them to a private school. So there's things that can change, but the bottom line here is just start early. I mean, I've just had a child 10 months ago, I started his first month. So every single month on the 5th, which is when his birthday was, I put a certain amount of money into an account. And with that money it's going to keep compounding from literally the first month he's born to when he's in year seven or year eight and ready for high school.

And you said the magic word there is compound is definitely. It is all about compound interest, isn't it? So have a chat to me about that.

Compound interest is like the most important thing about money. Like, it's. It's, I think, Albert Einstein's eighth wonder of the world. And if you don't understand compound interest, then that is something which I would highly recommend you just spend an hour or two. So you actually do get it. Everyone's heard of it, but I don't think anyone actually gets it. Compound interest is getting interest on interest. If you have $1000 and you get a 10% return, you now got $1100. Next year you get a 10% return. You're getting 10% on 1100, not the initial thousand. So you're getting interest on interest on interest. And it's like a snowball, gets more and more Mom. And the longer that compound interest grows, the faster it goes. So there's a great example where we've got two brothers, James and Arthur. James decided to put in $2,000 a year into an investment from the age of 19 to 27. So for eight years, he put in $2,000 a Year, put in 16 grand total. At the age of 27, he's out stopped investing. His brother thought, gee, he's got a bit of a jump on me now. I've got to start investing at the age of 27 and put two grand in every single year until he hit 65. So he's invested for sort of 37, 38 years, two grand per year. And what actually happened was the brother who invested first only for eight years, only 16 grand, actually had around about $700,000 more in savings, even though he'd only invested 16 grand compared to 76 grand. So that there is just a huge testament. Say if you put in 50 bucks per week for around about eight years and you never touch it ever again, no one will be able to catch you if they start eight years later and match that for the next sort of 40 or so years.

So start early and leverage off compound interest. That's the biggest tips we've got. Awesome.

Absolutely. And work backwards. So you need to work out how much you're going to need at the end and then work out what that means to start off with. How much do you need to be putting away each month of your child's life in order to achieve that amount of money?

Absolutely. And so having a set Goal and always estimate the cost of a little bit higher because as we know, private school fees do go up every year. Every year. So working backwards. And so we. You basically want to have maybe a goal every year, Is that what we're thinking?

Yeah, it would be a goal every month. So every, you know, working backwards every month, I need to put $200 a month away for my child's education in order to have enough money plus a little bit extra by the time they get to year 12.

Absolutely. And there's no stopping at year 12 either. You can keep going if you want to. And then given that nest egg that Scott was talking about for their deposit on their home or whatever it may be, maybe at their 30th birthday or something like that.

Well, also too, if they go to uni, they have that still cost fees. I mean, a uni degree can cost 30 or $40,000. So they have that debt when they start work if you don't pay for it. So you can continue to help them out right through uni.

Absolutely. So it's about setting up a plan and saying, okay, let's automate the savings. Let's start as early as we can, keep it going and leverage off compound interest. So what are some of the places that we can be putting this money into?

So, yeah, there's a range of options. It all really depends on how much risk versus reward you want to take. So you can do the very, very safe option of just putting a set amount of money every single month into a bank account, safe and sound. Nothing's ever going to happen to it, but it's not going to grow. It's not going to compound too quickly. I mean, with rates as low as they are now, you're really getting less than inflation. So it's not even keeping up with inflation. So I certainly wouldn't recommend that. I'm a very big believe believer in, in the long term upside of shares. I believe in companies being worth More in 10 years than what they are today and as a result participating in that growth. That's when you break it down. When you're buying a share, you're actually just buying a slice of that company. And I think it's really wise for a lot of parents to look at what companies they like. What do you really enjoy using or what do you really enjoy and feel that it's going to be future proof? So things such as Google or Netflix or Amazon, these are companies which you feel at the end of the day they're going to be. I love Using them. I love using Netflix and so I can actually buy a slice of Netflix and actually own a slice of that company there or Google, Facebook, et cetera. So you, when you stop thinking about shares, it's only investments? No, no, I'm actually buying companies which I like, I trust and I think are going to grow in the future. And that's just a really great way of using it. Zoom was a prime example. I've been using Zoom for two years. Before Corona hit, not many people sort of heard of it, not many people were using it. But I loved it was hd. Scott was very laggy, glitchy, jumped onto Zoom HD Crisp. It was amazing. I just didn't think I could actually own a share of this company. Wish I did. Hindsight's a wonderful thing. So I think that's something where a. You can obviously look at investing in shares, you can look at putting money into a bank account. You've got some ideas as well.

Well, one thing that I would probably steer clear of is there are some companies out there called who to save through them in order to pay for your child's education. And I would avoid those. The main reason being that they charge super high fees and if your child doesn't finish school, they charge really high fees to get your money back.

Wow, interesting.

Yeah, so they're actually quite risky. Whereas if it's in a bank account or if it's in shares or if it's in, you know, any number of other investments that are creating a return every single year, your money's going to go up. And at the end of the day, if your child doesn't go through and finish school. That money still yours?

Yeah, yeah, it's still yours.

Exactly.

And it's something to be to think of as well, you can invest in your own debt. So paying down your own debt means you're earning a guaranteed return because you're not paying interest on that portion of the debt. As long as you're quarantining it in a regional facility or in an offset account that you do not touch, it has to be, you have to have a little bit of self discipline here and you have to keep that money separated. But if you can do that and you're reducing your debt while saving for your kids education, you can draw down on that money in the future. That's definitely an option as well.

That's a great strategy. So if you are paying, let's say 3% interest on your home loan and you've got that $100 a month or $100 a week going into that offset account. It's literally earning you 3%, exactly the same as if we're seeing an intern deposit, but there's no tax on it. So interest saved is exactly the same as interest made. So that's a really good strategy. I've actually had clients where rather than putting the money in the bank, whether it be westpac, anz, cba, nab, they've actually bought shares in that bank. And so they owned a slice of the bank. So rather than having it just sitting in the bank account, not doing anything, they said, hey, I'm just Gonna put that 100 doll ANZ or NAB or Westpac shares. And they're doing that every single month. And so it does take a lot of the risk out. It's called dollar cost averaging in where every single month, no matter what the share price is, you're actually buying $100 worth of it. And so as the share market moves up and down, you're getting the average over that period of time there, which is an interesting strategy.

It's important when talking about investments to realize it all comes down to the personal requirements and your risk appetite and what you're interested in. You have to do your own research. The biggest things to look at are fees and what the potential upside are and what the big. Like the big one is the potential risks. So just really think about that. And definitely an option is to put this money into different areas and have different options. You might want to put some in savings, you might want to put some in your debt, you might want to put some into investments, management funds, ETFs, what it may be. So there are a lot of different options out there. I think the key to it is, is like automating it. So making sure you are committing to a set amount every single week, month, whatever it may be, and putting that money aside and that you start as soon as possible. I know my kids are 2 and 4 and we've already started and we're committed to X amount of dollars every year. And I've said that even if, yeah, they don't go to the private school, and even if they do go to private school, we will continue to do this afterwards. And if we can do it, then by both of their 30s, we can give them 300 grand each.

That's amazing.

So that's the goal. So. And it's. And it's not. This is not a huge amount of money. This is $10,000 a year. I think we said, sorry, that is A lot of money. You've got two sockets and daycare to pay for. But you know, we've said let's quarantine this money. We are investing in our own debt. So we are definitely paying down our debt throughout this time. And yeah, we've got that lump sum for private education and for something afterwards, a little present afterwards.

Amazing. And I think that's the key to quarantining, like making sure that that is quarantined. It is away, it's somewhere you can't see it because we as humans will spend what we have access to.

Absolutely.

That money is there and you know, oh, but I need that TV and it's right there and I'll pay it back. We can't do that.

And even on a bigger scale we'll say, oh well, we do need to do a renovation around the house that's really important. And like all those things do come, oh gosh, the car's broken, we need to get a new one or we can dip into the kids savings. So it's definitely about committing to that, knowing that that money must be used for the kids education, even setting a time frame and just saying we will not touch this money until this date in this month, in this year. When you touch it, maybe you take out a few grand and go on holidays, kids are off to school, you can go on a trip to Fiji maybe, I don't know. But yes. Anything else to add, guys?

There are some banks who allow you to do fixed term investments too. You do a term deposit where you actually can't touch it until a certain date and that may be something to consider.

Yes. For those of us that don't have a good. Absolutely.

Another style of investment which is called an insurance bond and how an insurance bond is mainly for the high income earners where whatever you're putting into the insurance bond over 10 years, it's locked down. There's no capital gains tax on that investment after the 10 year period. So that could be another strategy to look at.

Absolutely. So I think, you know, definitely, you know, the key ingredients that we've talked about automating, starting as early as possible, committing to a set amount, quarantining it in terms of where you're putting that money. It might be worth speaking to a financial planner or if you are going to do it yourself, make sure you do your due diligence, look at the fees, look at the potential risks, make a decision from there, but just stick to it, stick to the plan.

Absolutely.

All right guys, thank you so much. Thank you.