It's back-to-school time here in Australia. If it's a private school, it's time to pay school fees.
To be really conservative I'm going to assume a much lower 8%, as taxes are generally higher outside of superannuation. Bear in mind these are not exact calculations - we're just trying to get some ball-park figures.
If each year the parents invested the same amount as that year's fee, the kid could have $133,000 at age 30, or $287,000 at age 40.
No matter how many times I check my maths, I am astounded by how much that is. But it shouldn't be such a surprise. Time is a powerful asset in the investing world, and kids have more of that than anyone.
The same calculations as before now give results of:
At 30: $287,000
At 40: $621,000
At retirement: $2.45 million
That's just for primary school. Even if we assume high school is the same price (normally it's higher) then 13 years of schooling costs $97,136. Again, investing these fees could give the following amounts:
At 30: $437,000
At 40: $943,000
At retirement: $4.55 million
This is where I start to wonder which is better for a kid; private schooling or nearly a million dollars at age 40. But let's continue.
Again, investing that money could have really big outcomes.
At 30: $1.23 million
At 40: $2.65 million
At retirement: $13.2 million
Obviously we want our kids to have a great education. It can help set them up for a great future. As could the ability to buy a property outright at age 30. As could having the money to start their own business. Or a nest egg to support them while raising their own children. Or having retirement fully taken care of. Or being able to retire at a time of their choosing.
It's hard to know what would benefit our kids more - private schooling, or a six or seven-figure sum of money.
Perhaps a more affordable school allows us to invest partially in education and partially in other ways that could really help our kids later on.
Obviously returns can vary from year-to-year and from investment-to-investment. Please take this into consideration. The numbers quoted are based on the assumptions I outlined and could vary significantly. I also haven't taken inflation into account. These are intended as ball-park figures to illustrate the scale of what's possible, with this kind of money and the time available to young people.
PS. If you'd be interested in your own calculator where you can enter your own figures, let me know in the comments. If there's some interest, I'll put one online. You can also get my monthly-ish email updates, so you'll know when it's available.
An investment
Some schools describe their fees as "an investment" in the child's future. If it's an investment, let's compare it to other investments. What else could we provide for our kids for the same cost?
Other options
Scott Pape recommends investments bonds for investing on behalf of children. As they grow up, there's a range of funds to invest in shares. Or they can put it in their own superannuation (retirement) account, so we know they'll be OK even after we're gone.Investment rate
My superannuation account returns 10.2% over the long term - and that's after fees and taxes. But that's probably better than most.To be really conservative I'm going to assume a much lower 8%, as taxes are generally higher outside of superannuation. Bear in mind these are not exact calculations - we're just trying to get some ball-park figures.
School 1 - Relatively affordable
A relative of mine attends a fairly affordable local Christian school. The total tuition fees, up to year 9, come to $27,975.If each year the parents invested the same amount as that year's fee, the kid could have $133,000 at age 30, or $287,000 at age 40.
What if we invest for retirement?
If at age 16 years, we give the kid an amount equal to their total school fees - in this case $27,975. Invested in the kid's superannuation, 50 years later it could be $1.33 million.No matter how many times I check my maths, I am astounded by how much that is. But it shouldn't be such a surprise. Time is a powerful asset in the investing world, and kids have more of that than anyone.
School 2 - Middle range
OK, but what about a typical private school? My friend sends her kids to a primary school (P-6) that charges $7472 per year for a total cost of $52,304 - for primary school only.The same calculations as before now give results of:
At 30: $287,000
At 40: $621,000
At retirement: $2.45 million
That's just for primary school. Even if we assume high school is the same price (normally it's higher) then 13 years of schooling costs $97,136. Again, investing these fees could give the following amounts:
At 30: $437,000
At 40: $943,000
At retirement: $4.55 million
This is where I start to wonder which is better for a kid; private schooling or nearly a million dollars at age 40. But let's continue.
School 3 - High end
A "prestigious" private school near me charges $18,182 for prep, climbing up to $24,116 for year 12. This is where the numbers get really eye-watering. The total bill is $281,654. Ouch!Again, investing that money could have really big outcomes.
At 30: $1.23 million
At 40: $2.65 million
At retirement: $13.2 million
What should a parent do?
Some of those numbers are absolutely staggering.Obviously we want our kids to have a great education. It can help set them up for a great future. As could the ability to buy a property outright at age 30. As could having the money to start their own business. Or a nest egg to support them while raising their own children. Or having retirement fully taken care of. Or being able to retire at a time of their choosing.
It's hard to know what would benefit our kids more - private schooling, or a six or seven-figure sum of money.
It's not either/or
It doesn't have to be one or the other. Some parents can do both, but that can be really expensive.Perhaps a more affordable school allows us to invest partially in education and partially in other ways that could really help our kids later on.
Big disclaimer
Obviously this is not intended as financial advice or even parental advice. I'm just running some hypothetical numbers to give an indication what else could be achieved with the kind of money we spend on school fees.Obviously returns can vary from year-to-year and from investment-to-investment. Please take this into consideration. The numbers quoted are based on the assumptions I outlined and could vary significantly. I also haven't taken inflation into account. These are intended as ball-park figures to illustrate the scale of what's possible, with this kind of money and the time available to young people.
PS. If you'd be interested in your own calculator where you can enter your own figures, let me know in the comments. If there's some interest, I'll put one online. You can also get my monthly-ish email updates, so you'll know when it's available.
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