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FOOL'S EYE VIEW
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Great Titchfield Street, London -- We have quite a lot of information on Investing for Children on this site. We've even written a book about the subject. However, one thing we've rarely touched upon is financial planning for school fees. In case you think that's a bit snobby, then don't fret. Many of the same principles apply to saving for any sort of specific expenditure that you think you'll incur in the medium term. We can make this topic simpler to grasp if we break it down into three components:
Targets It goes without saying that the earlier you start thinking about saving for school fees and get around to investing some money, the better. Not only does it give your money more time to grow, it makes the contributions you'll need to make each year more digestible. The money isn't going to magically appear and there are no short-cuts that will make the whole process leave only the slightest indentation on your wallet. One of the problems with saving for any sort of specific event is that you often have a limited timeframe. Typically, you will be looking at a period of between five and ten years. This does limit your options somewhat, and it means that you might need to be a bit more cautious with your money when compared with investing for your retirement in thirty years time. Most people don't make any special arrangements for funding school fees. In fact it's estimated that only one-third of people do. The remainder are either so rich that it's not a problem (so let's forget about them), or they fund the expenditure entirely out of income, perhaps even going into debt. In many cases, the intention of school fees planning is just to cover part of the costs, not the whole shebang. But how much are we actually talking about? Fees can vary significantly between schools. For example, Harrow's fees for the 2001/2 academic year will leave you with little change from £18,000. Yikes! You'll need to do some legwork to see what sort of schools fall into your savings range. Day schools are going to be cheaper than boarding schools, of course. It may be that you'll need to reassess your choices once you've done some more detailed sums. According to ISCis, you are looking at £4,000 to £7,500 a year for a junior school and £5,000 to £10,000 for a non-boarding senior school. Multiply that by the number of children you have (or intend to have) and the scale of the problem is readily apparent. But to make matters worse, school fees have tended to increase much more than inflation. The current rate of increase is reckoned to be around 5% per annum, as opposed to inflation of around 2%. If this differential is maintained for the next ten years, then fees will be about one-third higher in today's money. You could use the calculators on our site to estimate how your investments might grow. For example, say you wanted to generate a contribution of £5,000 a year for seven years, starting in ten years' time. You could assume this was the equivalent of a £35,000 lump sum in ten years' time. If you assumed your investments grew at 8% then you would need to put aside £193 a month for the next ten years. In reality you might get away with less because your money will actually be invested for between ten and seventeen years. Where to invest One rule of thumb we are keen on at the Motley Fool is that any investment marketed specifically for a particular purpose is often poor value for money. Investing bonds specifically for children are perhaps the most notorious example, but there are also sharks in the school fees pond as well. Many school fee plans are unnecessarily complex (for instance, by employing bamboozling tax breaks), and this make it very hard to see how well your money is actually performing. It also makes it easier to hide high charges. It's a fact of investing that whenever you choose a product that limits your downside, you will have to pay a hefty charge for the privilege. In other words, your returns will be lower so you'll need to put in more each month to get the same final amount. If you can afford to pay a little bit extra from your future income, you may find that the reward of greater returns outweighs the downside risk. In particular, watch out for any restrictions in getting your money back. If your plans change, as they might well do, you don't want to be tied into an inflexible savings plan. One way of looking at this issue is to consider that school fees are just one element of your overall savings plan. If you were to invest in a tracker for both your retirement and for events such as this, then you have the best of both worlds. You have access to the full potential of the stock market, but you also have longer-term flexibility to invest more money if your returns turn out to be disappointing in the medium-term. You may want to use an ISA or pension for your retirement fund and the annual CGT allowance for your school fees money. Monitoring your money School fees planning means you're committed to doing some ongoing homework of your own. In fact, the same goes for any sort of long-term financial planning, such as investing for your retirement. On a regular basis (once a year will do), you need to sit down and assess how well your savings plan is proceeding. Redo the calculations and consider if your plans need revising whilst you still have time to do so. More: Family Fools discussion board | ISCis (lots of useful info)