20 January 2020

During a family's lifetime there will be many expenses, some of which will be expected, others that come out of the blue. Starting early with a strategy to save for the expected (and unexpected) expenses will help provide more certainty to the future.

Hidden costs to raising kids

Australian government data[1] found that the cost of raising two primary school children is estimated at $17,680 a year – just to provide the basic care - so anything extra such as private school fees will push that amount up enormously. If you would like your child to attend a private school or to participate in other out of school activities, the additional annual cost can be up to $35,000 or even more depending on the school.

If you want your child or children to go to a public school, the fees for some public schools can be as high as $3,000 or have incidental costs. Two or three children later and you may be up for close to $10,000 a year. And this will be in addition to other substantial costs such as mortgage repayments and the weekly grocery bill.

Costs of public versus private education

According to the cost calculator from the Australian Scholarship Group (ASG), a child born in 2019 will cost approximately $80,000 to educate in the NSW public system, while educating in the NSW public system for primary school and private for secondary school can cost around $349,000 in total. This number is dependant on regional versus metropolitan areas, as well as by state.

Three investment options:

Whether your child is attending a public or private school, there are significant expenses to account for during their schooling life. While there are several saving and investments options you can employ, here are three investment options to consider:

1. Investment bonds (also known as insurance bonds) provided by large fund managers usually have many underlying investment options available. The funds do not have to be used for education, and there are tax benefits after ten years but rules governing how much can be invested each year ("125% rule") make them inflexible.

2. Education bonds, (also known as education savings funds or scholarship plans) offered by ASG and Australian Unity, operate like investment bonds. The upside is that the 30% tax paid on investment earnings can be claimed back by the fund and passed onto the parents, when the money is used to pay for school fees. The downside is that the funds have to be used for educational purposes, which make them inflexible if education plans change. Depending on the conditions of the education bond, some only return the parent's contributions during school years and pay out the remainder (investment returns) to the child during tertiary years. Again, some children may not go down the path of tertiary education.

3. An investment portfolio set up with the specific purpose of paying for education can have the flexibility of contributions, and purpose. The trick is to start investing early, even before you have children. Having at least a ten-year time horizon will hopefully allow for capital growth. In addition, it is important that you are able to reinvest any profits made from your investments, this will allow you to benefit from the power of compound interest.

In addition there are a number of ways in which you may be able to supercharge your capital and ensure that you can meet the liabilities.

Our highly experienced advisers, alongside our specialist investment team, can work with you to provide investment portfolios that are developed exclusively with your goals in mind.

[1] Australian Institute of Family Studies, ‘New estimates of the costs of raising children in Australia’, AIFS, Sydney, NSW, Australian Institute of Family Studies, 2018, https://aifs.gov.au/media-releases/new-estimates-costs-raising-children-australia, (accessed 20 November 2019).