Chapter 2 - How much to save.
In the previous chapter, we looked at the costs of tertiary education. Education is a large & heavy financial burden. If you had to fund your child’s tertiary education today, you would be paying +/- R750 000 for a three-year degree (this is a ballpark all-in-cost number in today’s money. For more precise figures given your child’s age, look at the previous chapter). For the vast majority of us, this number is a huge percentage of our entire net-worth. And it would be impossible to pay without taking on considerable debt or selling our house.
Ignorance is a big mistake. Knowing that these costs only await us sometime in the distant future, we tend to ignore it. We say to ourselves, “I hear what you are saying regarding costs. But my daughter is three. She will only graduate in fifteen years! I will be much better off financially.” This is a big mistake. Downplaying or ignoring future liabilities will hurt! The R750 000 for a three-year degree in today’s money is R 1.69m in 2035. After putting your kids through school, believe me, you will not have R1.69m lying around to fund your child’s tertiary education. Do not wait for the universe to throw you a bone - via a promotion or lottery - before you start taking action.
If there is only one message you take from this book, let it be this. (1) Start small & (2) be consistent!
Start small. I am going to show you how much you need to save on a monthly basis to fund your child’s tertiary education. The amount of money you will need to put away will be more than you think. I can guarantee that. It might even be more than you can afford. Crucially, do not let it be an excuse for inaction. Rather start small. If you can only save R300 per month then start there.
Small & consistent. By merely starting to invest, you create a snowball effect. You start with R300 per month. This is what you can afford. A tiny snowball. In the next year, you add an additional R300 per month to the existing R300 which you are already saving. You are now contributing R600 per month. You have done it in previous years, so the following year you find an additional R300 in your budget. Your snowball is getting bigger. Then some true magic happens. Compound returns! Imagine your snowball rolling down a big hill. As it rolls, the snowball accumulates more and more snow. It does this naturally. The bigger it gets the more snow it picks up. It starts to exponentially get bigger and bigger. Compound returns, baby! Meanwhile, you are still chugging small pieces of snowballs at it to help it gain more and more momentum. After fifteen years of rolling down a massive hil and you consistently chucking small pieces at it, your snowball is gigantic. It knocks out the majority of tertiary education costs. All because you started small and were consistent.
So how much you should I be saving on a monthly basis? If your child is 3 years old, should you be investing R250, R500 or R5000 per month? What about your other child which is 8 years old?
The answers are all in this table.
- contributions need to be increased at 6% on an annual basis
How to read this table. Let’s use an example. If your little munchkin is 3 years old, they will start university in 15 years time. So you will look at the second column in the table. If you contribute R 2000 per month, you will cover about 66% of the all-in-cost of a three-year degree (tuition, textbooks, accommodation). To cover the full costs of a three-year degree at one of our universities, you will need to invest +/- R 3000 per month starting when your child is three and increasing that contribution on an annual basis by 6%.
If you were to invest R1000 per month and increase your contribution by 6% on a yearly basis, then you would cover about nearly a third (33%) of a three-year degree.
Remember the message “Start small & be consistent”. Not many can put away R2000 per month to save for their child’s education. So start small and then on a yearly basis increase your contributions. Build your snowball.