Saving for your children's future

Since the outbreak of Covid-19, people have begun questioning what the fallout is?

A gentleman contacted me recently because he just became a father, and one of the first things he wanted to do was set up a new account for his daughter.

He wanted to put the monthly children’s allowance they’d be in receipt of, into it.

And when his daughter was older, if she decided to go to college, he hoped he’d have enough of a fund that would pay for those future costs.

What he was doing was great.

Because we know trying to achieve anything, time is a huge factor. The longer you have the easier it will become to end up with the number you need.

And he wasn’t quite sure what that number was but one of his in-laws told him that if he saved the €140 they’d be getting each month, it would be enough.

And they weren’t wrong, as long as his child lived at home whilst at college, because according to a Zurich Life cost of college education 2022 survey, they discovered the lifetime cost of going to college where your child lives at home is c. €30,544.

When you run the math, where you save €140 for 18 years and your net return on savings is 3% and your factor in inflation at 1.31% which is the average rate on inflation for the past 20 years, your account statement would read that you had €40,032 but when you adjust it for inflation, and you must, in real terms you’d have €31,631 in today's money.

So, you’d be fine with that monthly contribution, as long as you get that 3% net annual return.

If your net annual return was for example 1%, you’d end up with €26,168 which is €4,376 short of what you need.

Which isn’t so bad, but if your child was living away from home it would fall a long way short.

Because in that same survey carried out by Zurich Life, they uncovered that if a child was living away from home in (a) rented accommodation the lifetime cost was going to be c. €61,308 and (b) if they were living in student accommodation, it would be c. €60,616.

And if these numbers happen to be the case in 18 years’ time and we don’t know if they will or not because a whole host of things could change in the interim i.e. rental costs, student registration fees, inflation etc. so they could be higher or lower. But we can only plan for and deal with what we know right now.

So, if they stay the same and our new dad all the while has been putting away his €140 each month thinking he’s doing great, and suddenly his daughter wants to college and ends up living away from home, he’ll soon discover to his horror that he could be at least 50% short of what he needs.

And he may not have the time to make up the difference and the monies have to come from savings or debt or income and neither might be ideal for him.

So, if someone tells you that €140 each month for a new-born is enough, think again because it may not be, and the tables below show you the reason why:

You can see from both tables (below) that the account you invest into is really important. Lodging €140 into any ole account may not to be enough, because it needs to earn interest if you want to come anywhere near the amount you might need.

And if you save into an account that compounds at 0.25% per year, it will add very little to what you saved. For example, if you save €140 per month and you earn 0.25%, in 18 years’ time you’ll end up with €30,927 but only €687 of that was interest.

When you factor in inflation, that €30,927 is worth even less i.e. €24,437 which means you really need to get the best possible return. It needs to match inflation just to standstill otherwise, you’re losing money in real terms.

If you save the same €140 but it earn 5% per year, you’ll end up with €48,888.

It’s the same €140 each month but with the right account you’d end up with €48,888 and the wrong one €30,927.

That difference by the way would pay for six years’ worth of registration fees (important if you had more than one child going to college) and if you think of it that way, perhaps it might be the motivating factor to seek out the right account, because as you can see with the numbers I’ve just run, it’s more than important.

And there’s one particular fund that I use for clients of mine who are saving specifically for their children’s future education where the average annual return for the past 10 years is +6.20%, so these accounts exist, you just have to be told about them or seek them out yourself.

And it’s not a question of wanting to invest in these types of accounts, but more having to if you want to reach the end cost without you having to either save more each month or having supplement the deficit when the time comes from other savings or income or having to take on debt.

You don’t want to get to a situation where the cost of going to college has to be funded by your monthly income. As one person I met recently who didn’t save in advance, remarked that ‘Cian has become our second mortgage.’

So, saving into a traditional bank or credit union account is unlikely to deliver the returns you’ll need, and we know that investment returns are needed to add to your total savings if you want to reach the target amount. The amount you save each month on its own is unlikely to be enough.

And I made reference at the top of the article about saving early because time is important and it really is.

The longer you delay the more it’s going to cost you if you want to hit those end numbers Zurich Life have suggested they’ll be.

If you save their children’s allowance from birth i.e. €140, about two-thirds of their future costs will be covered for if they live away from home, and that’s assuming you earn 5% per year. If you wait until they are 7, that same €140 will only cover one-third of their future costs and if you wait until they’re 12, it will cover just under one-twentieth.

In other words, your child’s saving fund will be 3.5 times’ bigger if you started investing at birth than had you started when they entered secondary school.

When you see how much it’s going to cost, it can be hard to know where to start or if you can start at all especially if you have more immediate and pressing issues like paying for childcare, covering the cost of increasing mortgage repayments, or paying rent. Planning for events that might be 15 years away seem less important than events that need paying in 15 days, but putting money aside early is really important regardless of how small it is, 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