With students up and down the country preparing to head off to third level, it is a timely reminder that education in Ireland is far from free! From the cradle to childcare, to primary school to secondary level and arriving to third level a parent’s financial priorities will clearly change and evolve over time.
Research carried out by Zurich on the Cost of Education in Ireland* reveals what parents estimate the cost of education to be compared with the actual cost. The research also highlights that secondary school expenses almost double that of primary and third level expenditure is triple that of secondary. It seems the higher the educational level, the higher the necessity for making sacrifices to cover education costs. The research carried out by Zurich showed the lifetime cost of primary school came in at €12,584, secondary came in at €15,696 while the lifetime cost of third level education came in at €30,544 and €60,616 for a student living at home and in student accommodation respectively. Now if you have more than one child, you don’t need me to tell you that things are going to get expensive!
Where do you start?
Financial planning is a must because life comes with its twists and turns. Good financial planning keeps you disciplined with regards to money and prepares you to handle any unexpected financial turmoil that might come up in life. It is important to first get a grip on the basics:
• Having a monthly budget will show you a clear picture of your finances, including the areas in which you might be overspending and where you could potentially save.
• Do you have an emergency fund in place?
• Have you put in place insurance to protect you and your family from the financial uncertainty and hardship that comes with unexpected illness or death?
While you cannot predict the future, you can instead plan for it. We know education costs are generally predictable so saving enough generally comes down to a question of ‘how much’ rather than ‘if’ or ‘when’.
A good starting point can be the child benefit. It is a simple way to build up a fund and the payment aligns perfectly with long term education savings – it is untaxed, paid monthly and will run for 18 years so particularly beneficial for funding third level costs.
In terms of products, there are a number of options available, and the right option will depend on if you have available a lump sum and/or you intend to make regular contributions over time.
Should I save or invest?
Savings are where most people start, putting any spare cash to one side to build up a short-term safety fund in case of emergency. This money is often best held in deposit or current account. However, over the last number of years holding too much of your savings in cash has been costly. In this regard cash isn’t always king and holding your money in cash or on deposit may make sense for people who are risk averse and, or have short term goals. If, however you are saving to meet bigger long-term investment goals a monthly savings plan may give your money the growth potential it needs.
The old adage ‘don’t put all your eggs in one basket’ is very applicable when it comes to your investments and when we talk about it in terms of money, we call it diversification. A multi asset fund or strategy will allow you invest in a diversified mix of assets. As with many things in life, the more risk you take, the bigger your potential reward and loss. Likewise, the less risk you take, the smaller your potential reward and loss. All investments involve risk and understanding how you feel about risk will help you select the right investment option.
The power of compounding
Compounding is the snowball effect in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. With the benefit of time and patience, compound returns have the potential to give your savings a massive boost.
The below illustrates the results of investing child benefit of €140 per month over a period of 18 years**
**Assume 4% investment growth net of charges and taxes
The below illustrates the results of investing €250 per month (€3,000 per annum) over a period of 18 years***
***Assume 4% investment growth net of charges and taxes
Small Gift Exemption
For the purposes of the small gift exemption, a parent can build up a fund and by assigning the plan to the child, can therefore make full use of the small gift tax exemption of €3,000. The exemption counts from any one individual to another meaning a married couple could invest €6,000 a year for any one of their children. By legally assigning the savings plan, the contributions to the savings plan count as gifts to the child. The child will be entitled to the proceeds of the policy because under the assignment, they are the owners of the policy. Provided that the parent(s) stays within the annual gift tax exemption, the child will not incur any gift tax either when contributions are made or when the plan is encashed.
The Fundamentals To Getting Started
When it comes to saving for long term goals, starting early and saving consistently are the key fundamentals. Try starting with your child benefit, by putting the monthly payment away or even a portion of it if you can. If this isn’t feasible, aim to save a realistic percentage of your household budget each month. It is important to understand your spending and by proxy your affordability. Earnings, savings and investments need to be aligned to these goals. Your life goals as well as your financial plan need to be revisited at regular intervals to ensure that your planning is on track with real life. Seeking the advice of a financial advisor puts you in the best position to make the positive changes required to build for your future and that of your family, and in helping to understand what you want to achieve with your money. This includes the level of investment risk you are comfortable in taking to ensure that you are well positioned to meet your long-term goals.
* Source: The Cost of Education 2022 | Zurich Ireland
Michael Foley is a Financial Advisor at Cantor Fitzgerald Ireland.