Educating your kids requires a plan

TONY Blair said “education, education, education”, while Abba said “Money, money money”. It’s still hard to get the best of the former without a pile of the latter.

Many parents are faced with massive dilemmas due to the spiralling costs of giving their children what they believe to be the best start in life. For example, should you pay fees out of income, or should you put money aside? Should you use the equity in your property (if there is any) or should you reduce your mortgage so that you can borrow later? How much will be needed for primary, secondary and university fees plus uniforms, trips and so on and will your children still be financially dependent upon you, while gaining further qualifications?

For many, the total cost can be as much as buying a house but instead of taking out a 25-year mortgage you are forced to pay over a much shorter period – typically around 17 years if you include primary schools. When funding more than one child, they generally enter and leave education in different years to each other. This makes any sort of calculation mind-bogglingly difficult.

These are the typical questions that today’s “New Model” financial planners answer, with the aid of sophisticated cash flow modelling, to help parents gain a clear vision of how best to meet the costs of education without ruining their own future. This is still quite a new concept to many people but an analogy might help. Think of the financial planner as a financial architect. Your desired financial position is the new home you are trying to build. Now imagine that an architect shows you a plan for your new home, it’s not quite what you had in mind, so you ask them to make some changes and they show you an updated plan, with the changes you requested.

When planning education fees, the task is similar. The financial planner looks at your income, expenses, assets and liabilities. Assumptions for growth, risk and inflation are factored in. Remember that school fees often rise by over 5 per cent per annum.

The plan shows surpluses and shortfalls and also looks at what might happen on the death or disability of a parent, plus the effects on retirement planning and even long-term care, if necessary. You can then request different scenarios, changing assumptions, amounts to invest, timescales and so on.

The result is that parents can understand how all their financial aspirations fit together and if they are achievable, before committing to a course of action, or any savings or investments.

Andrew Kemp is a Certified Financial Planner at Radcliffe and Newlands.

THREE IS A COSTLY NUMBER
DESPITE the best efforts of successive governments to reform the schools they run, thus far they have failed to convince all but those without the means or in the best catchment areas – which parents pay for in higher house prices – to be trusted to educate their children. But paying twice doesn’t come cheap. HMRC takes its slice, which goes towards educating other peoples’ children, whose parents are effectively taxed out of a private sector alternative.

Even if the most expensive schools in the country are ignored, paying to put your child through school and university is going to be costly. Radcliffe & Newlands work out that “putting one child through private school and funding three years of university is likely to cost around £150,000.” Based on the assumptions of 5 per cent return on investments and 6 per cent inflation, the following costs (at today’s prices) can be assumed for a child born today.

For those rare people with money in the bank, based on the assumptions above, the amount needed today would be £274,064; at the other end of the scale, those without savings would need to start putting away £3,283 per month to provide the money needed by the start of each education stage – although this monthly amount would be reduced as each education stage is started. And that’s just one child. With three children (born two years apart) Radcliffe & Newlands suggest that you would need £702,359 today, or be putting away £7,283 every month. No wonder increasing numbers of people are opting to have fewer children.

Philip Salter