Financial advice - Saving for your child's college

A gentleman contacted me recently telling me about his two children, who are 8 and 6 years old. He and his wife are currently putting their children’s allowance into a basic deposit account with their local credit union and the purpose of setting this money aside into a dedicated account was that it might be used in the future to fund their college education should they decide to go to college and if they don’t it might help with a house deposit.

Anyway, there were two things he wasn’t sure about which were directly related and they were

- How much was college going to cost them in the future, and was there a better account they could be saving this money into that would give them a better return?

He asked this second question because he was pretty sure their existing account was earning nothing, but he was hoping the €140 they were saving each month for each child would do the heavy lifting and would be enough.

Let me first deal with what college is likely to cost him in the future.

And the cost will depend on whether a child lives at home or away from home and how much of the cost a parent can or will fund.

According to a Zurich Life’s cost of college education 2023 survey, they discovered the lifetime cost of going to college where your child lives at home is c. €30,544, and if your child was living away from home in rented accommodation the lifetime cost was going to be c. €61,308 and if they were living in student accommodation, it would be c. €60,616.

And when I say lifetime cost I’m referring to the total cost over a four year period.

I have no idea whether this gentleman’s children would live at or away from home in the future and neither does he, but what I could forecast is what his savings would amount to based on a savings rate of €140 per month.

And over an 18 year period at an annual net return of 1.5% and when you factor in inflation at say 1.30% which is about the average annual rate of inflation in Ireland for the past 20 years, the amount in each of his children’s savings accounts in today’s money would read, €31,067.

Which means based on his current plan, they’d have enough if (a) the children lived at home should they go to college and (b) his savings account was earning a gross monthly return of 2.24% each month.

And it was very doubtful that they’d achieve that return every month from the account it was being lodged into and he wasn’t sure what rate the account was earning but he knew it was much lower than that 2.24% he needed.

And that 2.24% would need to be much higher if his kids happened to live away from home should they go to college.

If he maintained their present saving rate of €140 and he was getting a gross return of 2.24% each month and if his kids lived away from home, there would be a shortfall of c.€30,000 for each child.

And I think I can best summarise what would happen based on his current plan in table format where we can stand them alongside different future scenarios, and this is exactly what I did for him and it looked like this.

So, you can see that saving €140 each month and leaving it at that and forgetting about the return or the type of account it’s invested in, won’t cut it.

At best and I mean at very best, if he’s lucky to get 2.24% each month, he’ll just about have enough and if the account earns nothing and after accounting for inflation he’ll be €3,569 short.

And it gets worse if his kids live away from home whilst at college as the numbers below show. The point of putting these in front of him was that he wouldn’t discover all of this when his kids were older and closer to going to college because he wouldn’t have the time to make up any difference without having to make very big monthly contributions.

If someone pointed this out to him when both of his kids reached 13 years of age, he’d have to increase his monthly savings to €675 for each of them if he wanted to hit the target number, if, they were to live away from home when at college.

So, he’d have to save nearly five times more than what we would have been saving all along up to that point, and for some that would be too much and the consequences would be that they’d have to using their savings to make up the deficit or they may have to take on debt or it might put pressure on them should they have to fund the deficit from their monthly income.

And my advice to him wasn’t meant to frighten or worry him, it was factual i.e. I said if this is what you continue to do and if you don’t heed the advice I’m about to give you, this is what’s going to happen. And I told him to trust me with this, these are cold hard numbers that he could run himself, and there’s no ifs or but’s with them because this will be the outcome.

And the advice I gave him was as follows.

First off let’s assume they both go to college and live away from home.

Let’s plan for the worst and if they go to college and live at home, then you’ll have money left over which can help them with that house deposit you were talking about.

At this stage, for his 6 year old he had about €10,778 in savings but it needed to be €12,428 so he was about €1,650 behind with her. And for his 8 year old he had €14,704 but if he started off with the right account there should have been €17,947, so he was €3,243 behind with her which like her sister wasn’t so bad and not insurmountable.

The key to not having to increase the amount he saved each month was the account he was lodging this money into and I showed him exactly the account he needed. This particular account has been in existence since 2001 and has delivered annualised return of 8% since it was launched.

If he moved what savings he had accumulated into this account and continued with his monthly saving of €140 and the account continued delivering its 8% annual return, in 12 years’ time he’d have €61,731 for his 6 year old. And if he did the same with his 8 year old, at 18 he’d have €58,252.

Which means he’s a little under the target number for her and that’s because she’s two years older than her sister and she has only 10 years more of savings whereas her sister has 12.

Anyway, that’s what he needed to do and thankfully he followed through with my advice and we set up the accounts for him and they’re active and in place since February 1.

And the account has gotten off to a great start because since the beginning of February it has increased in value by 13.57% which is a great return in such a short time period. But that’s not to say that it will be like this all the time but they have time on their side and over the time period they are investing i.e. 10 and 12 years, the account has consistently delivered that 8% annual return.

And if it only returned 5% per year well that’s probably 5% more than he was getting before he moved the accounts. My advice to parents like the gentleman I encountered is to be proactive where they should reach out to their bank or their financial advisor to get an assessment of what they’re currently doing and whether that needs to change or remain the same.

And planning for events that might be 10 or even 18 years away seem less important than events that need paying in 18 days, but putting money aside early is really important as is finding the right account.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at [email protected] or www.harmonics.ie