Case Study(Funding a Child’s Education)

Funding a Child’s Education

Dean and Jenny are in their 30s and have a four-month-old baby, Alice. To ensure they’ll be able to afford Alice’s education, Dean and Jenny decide to start a dedicated savings plan. They estimate that by the time Alice is 11 they will need to have saved $84,000 (in today’s dollars) to meet her annual private high school fees of around $14,000 for six years.

Dean and Jenny choose a managed fund with a regular savings plan option. They kick off their savings with a lump sum of $5,000 and decide to invest a further $460 every month. Based on projected earnings of 7.7% pa and taking inflation of 3.0% pa into consideration, this means they should accumulate around $86,000 in 11 years.

If Dean and Jenny keep the savings plan going for the entire 11 years, they will be well placed to fund Alice’s private high school education when the time comes.

By maintaining the discipline of making monthly investments without touching these savings, Dean and Jenny will reap a great reward from compounding interest. This occurs when you leave the interest you earn in the account, so that you begin earning interest on your interest. The effect may be small at first, but if you leave the interest to accumulate in the account it can gradually snowball over time and significantly boost your savings.

Notes
  1. The estimated balance required and estimated school fees are in today’s dollars.
  2. The projected earnings of 7.7% are after fees and before taxes have been taken into account. No allowance has been made for taxation, including capital gains tax on investment earnings. Please remember fees and taxes have an impact on long-term returns.

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