Should you save for your child's tertiary education?

Should you save for your child's tertiary education?

Tertiary education is becoming increasingly important as Australia becomes a more competitive and cosmopolitan society. Without a diploma or degree, many young people find themselves struggling to break into the job market or earn a decent salary or wage. But how can you help your child in the future?

According to OECD Indicators from 2014, there are significant earning premiums for those with tertiary qualifications. People who have attained at least an upper secondary school qualification also did decidedly better than those who did not complete school. While none of this flies in the face of common sense, it is reassuring to know that a degree or diploma still represents the benefit that it always has.

What about student loans?

Student loans are a useful resource for covering tuition and associated fees, but can come at a hefty cost. Students that graduate with large amounts of debt will soon find the Australian Taxation Office taking a slice out of their pay cheque. There are three ways in which it is preferable to save up for study costs, rather than rely on future income to cover it.

1. A dollar today is worth more than a dollar tomorrow

If you and your child manage to save up ahead of time for their tertiary expenses, you’ll find that every dollar you put away is worth more than a dollar in the future. Economists call this the discount rate. Mark Harrison, in his visiting research paper entitled Valuing the Future: the social discount rate in cost-benefit analysis, noted that combining the interest-earning capacity of money now with increasing costs in the future, results in today’s money being worth more than tomorrow’s. 

While you might not be able to save up enough to cover all of your child’s tertiary expenses, a mixture of student debt and savings is better than racking up a huge bill for study.

2. Inflation

As the cost of living increases, your children will pay more and more for everyday services and goods that they need. This also includes education. By setting aside some money now, you can mitigate the effects of inflation by creating a buffer for your children. While some might argue that sheltering them from the real world may not do them any good, giving them the best possible start is certainly of benefit in an increasingly competitive world.

You know how hard it is to avoid accumulating too much debt, including car loans and other things that you want to pay off as soon as possible. Imagine the pressure on your children as these costs increase in the future. Household indebtedness is at levels your parents likely never saw at your age, according to the Reserve Bank of Australia. While there is potential for this to improve, putting a safety net in place to help your children avoid crippling amounts of debt is a worthwhile goal. 

While there is no interest payable on HELP loans, indexation matches the loan to the rate of inflation every financial year. According to Study Assist this is to keep the loan figures in real terms, but essentially what this means for your child is that their loan will increase at the rate of inflation for the lifetime of the loan.

3. Your savings account could benefit too

There are several ways to structure savings accounts that provide ancillary benefits. While you might put away a small sum every week towards your child’s university fees, the interest that accumulates on the total could either add to that sum, or be put towards another savings goal. If the interest rate does not favour savings accounts at the time, you might consider using an offset account to hold these funds, helping you to reduce the interest payable on your home loan.

There are many ways in which saving can help you and your family now and in the future. Providing a clear goal which everyone works towards is certainly a healthy way to start off on your savings journey, and what better aim than investing in furthering your children’s potential?

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Learn more about savings accounts

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.