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By Danelle van Heerde, 20 March 2015
Danelle van Heerde, the head of advice processes at Sanlam Personal Finance calculates that a child born in 2015 will pay around R216 500 per year to pursue a BCom degree by 2034 and around R172 500 per year in residence fees. A BCom degree currently costs about R42 100 per year at Wits University and residence fees (excluding meals) about R33 500. Since education costs are normally 3% above CPI, we can assume an increase of 9% per year until the child goes to university. Before the university costs, twelve years of basic school education at R10 000 per year in 2015 would cost parents R201 500 if we use the same 9% education inflation assumption.
To save for the above-mentioned BCom degree, parents would need to invest about R1 500 per month from birth, increasing yearly with inflation. To also provide for basic education will require a total monthly investment of R1 750, using an assumed investment return of inflation plus 2% after allowing for expenses.
“Since you won’t pay any tax on the growth on your investment, a tax-free savings account is an effective way to save for longer term goals like your child’s education. Your money will grow faster than in a regular savings account and the tax relief means the effect of compound interest, or earning investment return on investment return, is increased. You should therefore use tax-free savings accounts up to the maximum contribution to optimise your tax benefits.”
Another big plus of a tax-free savings account is that you can access your funds at any time without penalties. However, you need to consider that you will not be able to replace the money you withdraw without using up some of your annual and lifetime contribution limit.
Van Heerde said potential pitfalls to consider when investing in a tax-free savings account include: