How to invest if you want to send your kids to private school
When planning for kids, it can be easy to focus on the baby stage - preparing for long nights and endless nappies.
But where will you send your kid to school - public or private?
Educating your kids in the private system is a long-term investment in their future but also a long-term expense.
I have worked in finance for more than 20 years but I'm also a mum who planned long and hard for my first child. Despite all my planning, it wasn't until I struggled through expensive rounds of IVF that my son was born.
Understanding that life doesn't always go the way you plan also applies to your investments, and any saving plans you may have.
With school fees on the rise, it's crucial to plan ahead.
Across Australia, private schools charge $10,000-$40,000 a year for tuition. While this varies dramatically between metropolitan and regional areas, but families can be facing a bill of $450,000 to educate one child from kindergarten to Year 12.
Once your family has estimated the total cost of your child's education, the next step is to consider how you will pay for it. For some, setting aside a percentage of their wages each week is a good place to start, while others can access existing savings.
If you have five years or more until you need to start paying school fees, you could consider investing money earmarked for education.
Here are some advantages and disadvantages of exchange-traded funds (ETFs), investment bonds, bank deposits and mortgage offset accounts when it comes to paying private school fees.
Exchange-traded funds (ETFs) and managed funds
ETFs and managed funds are both popular options when saving for your children's 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 - whereas 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, 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 in your family or partnership is earning less, it may be beneficial to place the fund in their name.
Investment bonds can generally invest similarly to managed funds, but 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 10 or more years, no CGT is incurred by the investor resulting in less tax that needs to be paid.
If ETFs nor investment bonds are not right for you, another option is bank deposits.
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 2 in the 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-rate environment potentially reduces the benefits.
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 into 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.
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.
Having a plan B is the best way to mitigate unforeseen expenses or changes in your circumstances.
If a sudden illness or injury prevents you from being able to earn an income, plus adds extra medical costs to your household budget, are you going to be forced to dip into your children's education fund to meet the shortfall?
Everyone's circumstances are different, and what works for one family may not work for another, so having a clear idea of your financial goals and preferred route for educating your children ahead of time is a good place to start.