PLANNING FOR THE FUTURE
By Interactive Investors
Monday, December 14, 2009.
Editor’s note: This article is targeted at UK-based readers. Please seek expert opinions before making financial commitments.
The costs start to rack up even before they're born. Pregnancy tests, folic acid, health checks and healthy food all cost money and Pregnancy & Birth magazine put a figure of £2,500 on the cost of preparing for a baby's arrival.
The price of education
Education is when the big bills start. If you plan to send junior to an independent school you can expect to dig deep for their fees. The Independent Schools Council's 2006 Census found that the average fee was £3,456 a term, with this ranging from an average of £7,291 for boarding schools in Greater London to £2,359 for day fees in day schools in the North of England.
And these fees rise at rates greater than inflation. For instance the Independent Schools Council report found that the average annual increase was 5.7%. Assuming this rate of increase, if your child attends a pre-preparatory day school in London from age two to seven, junior school until age 13 and then goes on to senior school until age 18, this could cost you around £250,000.
There are usually extras on top of these fees too. These could include medical supplies, telephone calls, school books, examination entry fees, lunches and lessons for extra curriculum activities such as music or ballet. Some schools don't charge for all these extras but the Independent Schools Council says that in some cases they can add a further 10% to the cost of your child's education.
Even plumping for a state school education can cost you money. Research by Yorkshire accountants MGI Watson Buckles found that parents shell out an average of £9,515 to get their children through state education from age five to 16. This money is spent on essentials such as uniforms, books, school dinners and transport as well extras such as school trips and after-school clubs.
There's a further cost that can come into play. To guarantee a place at the best school in the area you'll need to live in its catchment area. Research by Professor Paul Cheshire of the London School of Economics into property sales in Reading found that homes close to the town's best primary schools cost a third more than homes near the worst schools. When it came to properties near the best secondary schools, prices were around 18% higher than those near the worst schools.
Even if your child gets to age 18 without breaking the parental bank, a three or four year degree course might help to finish you off. Once seen as the education route for the intelligentsia, the Government is keen to open university education for more people and aims to get 50% of 18 year olds to go on to higher education.
Student debt is virtually unavoidable. According to Barclays, in 2005 the average student graduated with debt of £13,501. This represents a 12% increase on the previous year. Extrapolating this forward and today's newborns could find themselves with an average debt of around £145,000 when they graduate in 21 years time.
While this is a significant debt to start out with, changes to the way further education is paid could mean debt rises faster. From the 2006/07 academic year, universities will be able to set their own fees for tuition. Currently, these are set at a flat rate of £1,175 a year but, under the new rules, they could be anything up to £3,000 a year. Unsurprisingly, many universities are keen to charge this upper limit.
Although students will be able to take out student loans to cover these fees, and only need to start repaying them when their graduate earnings are above a set limit (currently £15,000 a year), starting life with these debts can seriously affect their ability to get started in life. Indeed, already the average age of a first time buyer has increased to 33 and there's also been an increase in the number of children moving back into the family home while they wait to get onto the property ladder.
Doing your maths
Planning for the cost of school and university education as early as possible will take some of the sting out of these costs - and possibly even prevent your kids returning to the nest after university.
Starting early gives your money longer to grow so you might not need to find quite as much as you thought. For example, if you save £100 a month for 18 years at a growth rate of 7% you will have £43,321 at the end although you'll only have paid in £21,600.
If you do have such a long period to save for the costs involved with your child's education you can consider putting some of your investment in the stockmarket. Although the value of stockmarket investments can fall as well as rise, over the long term, equity-based investments outperform deposit-based savings accounts. For instance, according to figures from fund information provider Lipper, if you invested £100 a month in the average UK unit trust at the end of 18 years it would be worth £55,776. In contrast, putting the same money into a building society would be worth less than half of this, £26,133.
A variety of different products are available that can give you stockmarket exposure. You could consider investing directly in shares but this will mean your financial fortunes are linked to the performance of just the few companies you invest in. Collective investments such as unit trusts, open ended investment companies and investment trusts spread your investment in a greater number of companies so, if one performs badly, you won't be so adversely affected.
The way you'll need the money may also influence the type of investment products you'll use. As education fees are typically required on an annual basis you could use a product such as an investment bond, which allows you to withdraw up to 5% a year tax-free.
When it comes to helping your kids through university, an increasingly popular option is buy-to-let. The beauty of this is that the child can rent out rooms to their friends and use the rent to cover the mortgage.
There are downsides though. Buy-to-let should be regarded as a long-term investment but most university degree courses only last for three or four years. If property prices don't rise substantially this might not be a long enough time to recover the costs involved in buying and selling it. Therefore, this should only be considered if you are happy to keep the property, and landlord responsibilities, on long after your child has graduated and moved out.