By Craig Simpson*
Q) My wife and I recently received the news that we are to be parents next year. Being a forward-thinking kind of chap, I would like to start an educational fund for the prospective family member so that he (or she) would be unburdened with debt once finished with their studies.
What sort of investment options exist in New Zealand, or abroad for this?
The following is provided as generic and general information only and is not to be deemed advice under the Financial Advisers Act 2008. For advice tailore to your specific situation please see an Authorised Financial Adviser (AFA).
A) There are limited options available in NZ at present.
In terms of a dedicated education fund I am only really aware of the Australian Scholarships Group (ASG) education fund I do not know of anyone who has used this service so am unable to shed any light on it for you.
Globally and especially in North America there are multiple options available mainly due to the cost and emphasis given to college/tertiary savings. For example, the Canadian Government, as an incentive to get parents savings, offering matching funds up to C$1,400 a year.
In New Zealand, I would suggest the most popular method of saving for children's education funding is to open a bank account and make regular deposits. The biggest risk is that this type of strategy does require a high degree of discipline.
To ascertain how much you need to save, you can a regular savings calculator. We have one here on our website, alternatively you can use the one on Sorted.org.nz's website. It also has another section on budgeting for baby which you might find helpful, despite the fact there is nothing on education savings accounts.
Assuming a standard undergraduate degree today costs approximately NZ$24,000 the same qualification could cost approximately NZ$60,000 in 18 years time, after taking into account tuition fees increase by 5% per annum. We calculate that you'll need to start saving $109 per fortnight form the time bub is born until they are ready to head off to uni.
There are many variables you need to consider such as living costs (assuming your child does not want to live at home or is unable to attend a local university), type of degree and length of study, need for a computer or similar device, books, when trying to estimate how much you'll need to start saving.
To assist you, I have put down my own thoughts to give you a starting point - these are based on my own estimates only and I would encourage you to explore what the various universities or university closest to you charge for doing a general degree.
- return expectation after tax and fees = 2%
- regular savings frequency = fortnightly
- tax rate is done at 33%
- Average cost of papers today is approximately $1,000 and this is inflated at 5% per annum for 18 years = approximately $60,000 per annum (assumes 8 papers per annum @ $2,400 per paper)
- Average study length = 3 years (assumes basic bachelors degree and does not account for Honours, Masters or Doctorate etc)
The average university year is approximately 26 weeks (two terms of 13 weeks) so if you want to provide your child with living expenses this will be on top of the tuition cost.
These numbers and assumptions are guides only and invariably will change over time.
Check out this university saving calculator here to change the variables.
If you have a mortgage, you might want to take a different approach to baby's education account by paying down the debt faster, so you can save more later. As I do not know your circumstances, it is difficult to say whether you'd be better off with this approach. It also depends on your habits and whether you can firmly commit to mortgage fast-tracking and when that's done redirecting the necessary savings into an account without splurging on a new car, holiday or home reno because you'll have a much shorter time frame to save.
For those parents who have access to capital now they may wish to put aside a lump sum and let it grow over time without having to make regular savings. The amount required to be deposited today to grow to the desired sum in the future will greatly depend on the interest rate and tax rate assumed. Again you can use the calculators on our website to work through some scenarios.
You will note I have refrained from suggesting the use of shares or a managed investment. The outcomes can vary depending on the markets and as a general rule my approach for people with specific goals in mind is to use a bank account where you know your money is reasonably safe ( there is still some risk) and you are receiving a fair rate of interest.
If you wish to consider using alternative investment vehicles to achieve your goals I strongly recommend you seek the assistance and advice of an Authorised Financial Adviser (AFA).
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*The above is provided as generic and general information only and is not to be deemed advice under the Financial Advisers Act 2008. For advice tailored to your specific situation please see an Authorised Financial Adviser (AFA).
31 Comments
The Mrs and I look at ASG. They seem pretty good. An Aus based non-profit. It is primarily based on saving for University - we decided private high school might be more relevant nowadays given the current long running interest free University fee situation and the state of some high schools. Returns looked good but we decided we could get the same with the option towards high school or whatever.
My old brother bought a nice 3br flat in Eden Terrace when their boys were young with their 20% deposit (about $30K). Then the boys went to Uni, they used some of the rental proceed to pay for their uni fees. Now mortgage free, both boys are staying at the flat and paying rent to mum and dad.. Not a bad scheme I thought!
There certainly is such thing as a free lunch. Just depends on who gets it. You can bail out insurance companies and finance companies if you think that is better for the economy. This is a free lunch for failed corporations. Or you could speculate on young people to generate future wealth.
If you want to put it that way.
And money does grow on trees by the way.
Was tax 50% here when higher education was free? No.
So if you pay 33% here you're busting a gut for nothing for 4 months?
The top tax rate in France is 41% above 70K (Euros), not much higher than it used to be here. Income tax is paid at the end of the fiscal year and while additional deductions are made on each pay check, they cover all sorts of things other than income tax that we don't have in NZ.
Eg, 100% medical cover (includes every possible medical bill so you don't have to worry about dentist costs, optician or anything else etc), unemployment (2 years paid at around 70-80% of your salary if you lose your job), retirement and the list goes on. As you said, no such thing as a free lunch. You get the service you pay for.
Okay , so its very expensive but it can be done without resorting to interest free student Loans and other long term burdens
1) Stay at home and commute if possible
2) Find a weekend job (our daughter worked in s sports clthing store )
3) Buy used textbooks instead of new ones
and finally , parents should pay for the tuition fees.
Well why not just download the whole course?
In this high tech age do we really need to re-locate to another town, help pay for a massive infrastructure, transport daily to the UNI or polytech and support an army of lecturers (they could be out inventing stuff) and their hangers-on.
Put the whole thing on the net for free with a modest charge for exams etc.
Tertiary education will become in-expensive one day. Get the very best international lecturer, in any one topic, video all their lectures for one year, then the university makes it available online for a nominal fee for 3 or 4 years. Occasionally as the course material updates, just update the one lecture. The one-to-many-principle. Get 3 or 4 years mileage out of the one lecturer. In some of the US off-campus institutions they are doing that now. But still charging full freight.
This is definitely coming and will be welcomed by most, but a disruptive development for those with a vested interest in maintaining the dated heirarchy and physical structure of universities as we know them today. Secondary schools will not be immune either. I would love to have been able to "youtube" my lessons when I was a teacher. If only we had a comprehensive hands on apprenticeship scheme many of the kids mucking around at school today would be given the opportunity to grow up and be useful. NCEA would be given a well deserved kick in the guts too, but the screams from servile serpents and others with a vested interest in the status quo would be deafening. The money to be spent from asset sales on physical school infrastructre is mostly money down the drain IMO.
Rant over.
What type of course would a remote(downloaded lectures) method apply to?
The 'really' useful courses (engineering, medicine etc) demand direct on-site interaction and preparation under professional supervision.
It may be OK for some of the subject matter of arts and law but not for any course that will add to the sum total of knowledge and advance society. The truth is we have too many students following crap subjects right now.
I am in favour of preparing kids to master their own fates with great money management skills at the earliest age and that will help through life. Both of my kids had to take out loans despite our ability to fund them. By choosing the courses that almost guaranteed them a job even before graduating, they were able to clear their debt in very short time. The help we gave them was limited to free board for holidays and until the back of their loans were broken.
I accept that this is not always possible unless parents live in a major city with a university with the right courses though in our case this was not necessary.
I agree that the world of education will be a different place in 10-15 years time
Have a look at what courses Stanford University in the States currently offers and while you are at it check what they are offering for free. We have people at work doing some of them.
Of course, credentialism and the cost of tertiary ed have given rise to the Higher Ed Bubble:
the basic equation to consider is a classic economic one.
Will the total of fees, board, lifetime of loan interest, lost earnings (let's call it C for Cost), be less than the increment to Earnings (over a shorter working life, dinnae ferget) conferred by the said Credential (let's call that E)?
If C > E then fuggedabootit
else ProceedwithCaution
end if
Lovely simple algo.
Tough choice.
But on the subject of Edumication over the InterWeb, consider this.
Who builds, implements, codes, checks and tests the vastly sophisticated systems which sit underneath factories, farms, stock exchanges, traders and merchants. (Let's leave Banks out of this, they're too smelly at the minute).
Why, IT chaps and chapesses.
Who educates them and how?
IBM, Microsoft, ORACLE, Cisco, SAP etc.
And how do these firms run all this training?
On the Interweb.......for surprisingly little cash outlay. An MCSE for say $4K. Try a year at Uni for that....
Oh, sure the IT entrants mighthave a Degree to strat with. But that's just to make sure the blighters can Spell and Add (primary and secondary not being terrifically good at either). It's the entry point, not the end state......
Try this - Open Universities Online
A bit closer to Home
http://www.open.edu.au/public/home
Search for Open Universities Online .. they're all over the place UK, AU, US
Only one I could find in NZ is Massey Distance Learning
http://www.open.edu.au/public/future-students/fees-and-charges/unit-fees
Domestic Student fees
If you are an Australian citizen, a New Zealand citizen, or the holder of any category of permanent Australian visa you are considered to be a domestic student.
Just got back from the States where our daughter and son-in-law have just graduated. Their combined loans are over US$500,000. However as our daughter will work in a Think Tank in Washington and our son-in-law is a doctor there loans will be paid off over 10 years by the federal government.
For anybody interested in US politics have a look at David Sangers "Confront and Conceal". My daughter was involved in writing it and it is now No 1 on the NY times best seller list.
Actually, she isn't 'earning'. She's relying - like Amanda does here - on someone else doing something real. Both of then expect to buy real groceries/firewood with their 'earnings', though. All those 'removed from the 'real' incomes are Soddys 'negative pigs'. They expect to purchase 'positive pigs', but sooner or later, there aren't enough. That makes the negative pigs worth a lot less, as it becomes a bidding war.
One should not owe pigs at the point where the music stops.
So what date exactly does the music stop PDK?????
http://www.telegraph.co.uk/finance/commodities/9179202/Peak-oil-doomsay…
Here's a great comment from your link which somewhat relates to what PDK is saying:
What people tend to forget is that the 'doomers' are often scientist who have researched this issue deeply. And they aren't saying that the end is nigh, but if we continue down a certain path, it doesn't look good. And we aren't going down the same path, we are changing, albeit slowly.
The problem with Mr White's article is that he states that we are in some new energy elderado, but none of the sources he quotes can power transport efficiently. Planes will not run on natural gas, or coal, or renewables. Nor does shipping (Cars/trucks can, but there is a huge way to go to make it commonplace). To make them do this we need a technology breakthrough and then make and supply them. This hasn't started, so we are at least a decade away from gas-driven airplanes, if the technology exists. Same goes for tankers. They run on oil. And cars/trucks.
So, I agree that the world won't end, but the world we know has a very high chance of ending. Globalisation, the power behind the economic miracle for the last 20+ years, will die without cheap planes, shipping and trucks/cars.
We are now in an oil constrained world. It's happening now. Each time we have good news on any major economy the price of oil goes up, nipping any good news in the bud.
Finally, remember, there are 3 'peaks' in peak oil. Geological (how much is in the ground), Production (how much we can extract and bring to market) and economic (when the financial markets deem that oil is in short supply and bet on higher prices, pushing prices up).
Without an ever-growing real economy, what are the possible outcomes for a financial system which depends on constant growth!?
Sorry, I must be a bit simple. I do not know what you are talking about, can you please explain in simple words.
If it is to suggest she does not have a proper job, I will let you decide. She works for the "Think Tank" , Nuclear Threat Initiative and her Job is to moniter all Nuclear weapons and material around the world and to try to influence governments on keeping them safe. I hope ypu agree that is a job we want somebody to do.
Keriwin - you're mixing the social derirability of what she does, with the energy/resource depletion of what she does.
Wealth - don't make the mistake of thinking of money as wealth, money is a proxy only - is ultimately the ability to buy stuff. Real stuff. There is far more fiscal transactioning every day, than there is real activity - so the fiscal system is a ponzi.
If she's 'spent' what she's earned, then she's OK when the misic stops. If it's 'in the bank', in 'shares', Investments' or the like, chances are it will vanish, or buy much less than hithertofore.
I rate activity as 'real' or 'not real'. The 'not real' (say, a lawyer offering advice for $200/hr) was underwritten by an easily-gotten supply of resources, supplied by an easily-gotten supply of energy. In the early days. Between WW2 and now, we've stretched that bungy beyond the underwrite. We did so by assuming that what had happened recently, would keep happening. Trouble was; that which was happening was exponential growth. You can't project an exponential graph asa linear progression.
http://www.zerohedge.com/news/chris-martenson-trouble-money
http://richardheinberg.com/bookshelf/the-end-of-growth-book/praise-for-the-end-of-growth
steadystate.org/wp-content/uploads/Daly_the_crisis.pdf
So - only real work, done with real energy, actually underwrites 'wealth'. All else is not underwritten. We can 'value' existing stuff more and more (think houses) but that process self-destructs. It may not be the folk who do the artificial who lose, and it may not be the doesr of the real, who win, (it depends who holds the parcel when the music stops) but the fraction is guaranteed.
You have two options -there is the hard way - or the very hard way. (borrowed quip, but i like it.)
You put regular money aside, starting as early as possible. Like today. And you keep it up without break or remorse until you have done the job.
You will want to maximise the investment return so manage it via an interest bearing bank account, or some fund like Carnel Fisher's or Mr Gaynors. or all of those.
It starts off slow and then starts to take off.
If your finance personality enjoys this you will find it a startling success. But if you can't keep lollies and have to eat them on the way home from the supermarket - you are truely screwed,
The variation to this is if you have some special skill or angle. And example would be the people who bought the flat at the right price/time/location. Can work, but you gotta know just what it takes to make that work.
As a former student, and now as a parent of young children, I can completely understand the anxiety people have when it comes to saving for tertiary education. I completed my Honours degree in 2005 and then completed an extra diploma part time over four years whilst working full time in 2011. Between 2002 and 2011, papers in the same subject at Massey increased from $444 to $661, or a 49 per cent increase in a decade. I shudder to think what students in ten years time will be paying for their tertiary education, particularly when most will borrow through the student loan scheme against future earnings that will be unlikely to grow at the same rate as tertiary education costs. Sure it's interest free, but there are follow on effects with things like borrowing for a house when you are still making loan repayments.
It seems to me that the government is readying itself for less subsidies to go into tertiary education, which would make the whole system more elitist for only those who can afford it. I don't believe that is the society we want, rather we want more highly skilled people in employment. To me it seems that the government is more interested in churning 'employees' out of the tertiary education system, rather than people with 'careers' who can add innovation to society. Student allowances are now virtually impossible to obtain unless you are over 24 and studying for the first time. Postgrad courses are now excluded so expect those student numbers to drop off alarmingly. I can't see anybody being able to live on the student loan for $173 a week (unless maybe if they are in Palmy or Dunedin), particularly if they are a post grad student with children, which many would have by that stage. I don't think students spending their whole week working is ideal either - this clearly affects how much effort a student can put into their studies and rather than excelling many students just do the minimum.
My advice would be go to one of the Scandanavian countries and get a free tertiary education. Oh wait, student loans etc for living costs can only be used in New Zealand so you will need to find your own living costs from somewhere. How silly of me to forget that free trade only relates to business and not to the end consumer.
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