In the last post, we looked at what should take priority between education planning for our kids and retirement planning, and the consensus even on Twitter was that retirement comes first.
@RookieKE my dad says that you should always prioritize saving for your retirement,money for educating for your kids usually has a way1/2
— Bitch You Guessed It (@laureezyF) January 20, 2017
As Laura highlighted above, you can even crowdfund for education, but you cannot crowdfund for retirement – that would be begging, which we should plan to avoid at the very least.
Assuming that you have an ongoing retirement savings plan, and you want to start saving for your kids higher education, there are a number of options to consider. These are from my own experience, talking to other parents who have done this and from a number of investment professionals. I will be doing a series of posts on these, and would love to hear what you think about them, and your own addition to the pool of ideas.
1. Savings accounts: This is the most basic and most accessible way of saving for anything. A savings account serves as a place where you can build up funds gradually, then deploy them to other investments. I find savings accounts good for a number of reasons:
- Convenience. It is quite easy to set up a savings account that is linked to your spending / current account. We now even have savings accounts built into our mobile phones with MShwari and other mobile banking products. No signing papers, no IDs, PIN etc.
- Cheap to operate: Most banks will not levy any charges to savings accounts.
- Automation friendly: Again, it is free to set up a standing order to a savings account if it is in the same bank, so they work really well in taking the saving decision out of your hands. Just set up the standing order and forget about it.
- Some savings accounts limit the number of times you can withdraw your money, though the deposits are unlimited. This works great because you want to withdraw your savings when they are substantial.
For all the advantages, savings accounts present certain disadvantages
- They do not pay much in interest. Banks are currently offering a minimum of 7% p.a on savings account balances. If you do the math, it would take a really long time to build substantial returns this way. Really, the return is almost matched to our long term inflation rate which is estimated at about 6%, meaning your money is gaining very little.
- They are easy to access if you do not mind paying the penalty for early withdrawals. A transfer from a savings account takes less than a day if it is the same account. This means that if you really want the money, you can get it.
In summary, Savings accounts are great for automating your finances and to accumulate month-to-month savings. For long term plans such as education savings, you should use a savings accounts to protect the money from impulse spending for a short period, then ship the funds off to less accessible and more profitable schemes.
Over to you, what are your thoughts about savings accounts? Do you have an automation mechanism in place, and how well has it worked for you so far?
Next post is about education insurance. Do education policies really work?
In the meantime, have you heard about the #52WeekChallenge with MShwari? We are making savings something we do daily and consciously for the next one year. Join the challenge by printing the worksheet and starting to save little amounts from your daily spending. We are using the MShwari Lock Savings function to track our savings and also stash them away. Do not forget to connect with everyone else on the challenge on our Telegram Group on Twitter where we chat about this constantly using the hashtag #52WeekChallenge .