Question:
I have two kids, aged 11 and three. I have about R6000 saved for them in a 32-day call account with FNB. I would like to invest this money into unit trusts and contribute monthly to this.

Please advise where I should start, or do you have any other suggestions?

Answer:
Raising children can be the most humbling yet rewarding journey you could possibly hope to experience in your lifetime. As a parent, provider and nurturer, you can’t ignore the questions regarding the financial responsibility you have towards them and the practical implications this may have. When deciding where to invest money for your children, you need to answer an important question: what is the money destined for?

Essentially, a major reason parents take on the decision to invest is to secure a private and/or tertiary education for their child(ren). The advent of education policies was brought about by parents wanting to set money aside for tertiary education and was predominantly 'housed' inside a standard endowment policy.

This made sense because time was on your side and the premiums were not ridiculously onerous. As an example: should you wish to fund a four-year university degree and you start saving from your child’s birth, it would result in a premium of around R1050 per month. This calculation assumes a 10 percent growth rate and premium increases of seven percent. If this is your goal, then by all means you could look towards this strategy as your solution.

If, however, you are looking to fund private school tuition, then the discussion needs to take on a new angle. Using a similar example as above and assuming annual fees of R45 000, the benefit of time reduces to a mere six years. Having just six years in which to raise the required capital, the monthly premium will need to be somewhere in the region of R7500 per month — something I am sure a 'new parents'' budget will not be able to survive.

Of course, if we decided to rather start saving now and continue our savings throughout the child’s school years, then the premium lowers somewhat to a more manageable figure of around R2700 per month. But does it make sense to fund an education policy through the term of tuition and incur all the costs of a policy if all I am going to be doing is withdrawing at a faster rate than saving? Probably not.

So where does that leave us when it comes to school costs? The most prudent way to do this is to find out what the fees are at the school you plan to send your child to and then set an amount aside in your budget each month to cater for this. This will ensure that other lifestyle expenses don’t begin eating into this money, something that is hard to reverse later down the line. This will also allow you to build up a reasonably substantial amount to fund other extras such as school trips, uniforms, sports equipment, etc.

But where do you put it? Well, these days you may select between an endowment, unit trust, LISP (basically an administrative platform with access to a variety of unit trust funds) or even choose from a number of savings accounts. Unfortunately, there isn’t an exact answer for what investment vehicle would be perfect for your savings. The investment vehicle landscape is complex and designed to address very specific circumstances for each person’s individual needs. But to interpret it broadly, there are essentially three key differences between these vehicles.

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