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.

Can you have multiple ING savings accounts?

Yes, you can open up to nine accounts with ING at any particular time. If you’re saving money for various goals, such as buying a car or taking a holiday, you can name each of your multiple ING savings accounts differently.

To get a Savings Maximiser account, you’ll need to deposit more than $1000 every month and make at least five additional purchases. If you also want to grow your savings, from 1st March 2021, you can earn up to 1.35 per cent per annum variable interest on one account with a balance of up to $100,000 when you also maintain an Orange Everyday account.

With ING, multiple savings accounts can help keep track of all your savings goals. All the accounts offer flexible withdrawals where you can withdraw as low or as high as you want without impacting your earning interest rate. However, you can only earn the bonus interest on one account. To apply for a Savings Maximiser account, you can visit ingdirect.com.au.

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

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.

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

What is an ANZ locked savings account?

An ANZ locked savings account locks your money and prevents you from spending. You may use a standard savings account as the account where your salary is deposited. You can then withdraw funds when needed, but aren’t able to make purchases with it. However, this account may not grow much as the continual withdrawing of funds will limit the interest you can earn.

With a locked savings account in ANZ, you know your savings will grow because you can’t access the money. You can also qualify for a bonus when you deposit at least $10 per month and don’t make any withdrawals. To help you with this further you can set up an automatic transfer from your regular ANZ savings or transaction account so you don’t forget to make a monthly deposit.

Your ANZ locked savings account offers you a base interest rate of 0.1 per cent per annum plus an additional bonus interest of 0.49 per cent per year. The interest is calculated daily and credited to your account on the last working day of the month.

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.

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.

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. 

What is a Westpac locked savings account?

The Westpac locked savings account (also known as "Westpac Life") can help customers reach savings goals faster through bonus interest. Customers receive 0.2 per cent standard base interest with a variable bonus rate of 0.35 per cent when the closing balance at the end of the month is higher than the opening balance.

There are some conditions to earn the bonus interest on Westpac's locked savings account, though. First, you’ll need to increase the balance each month either through a deposit or not making any withdrawals, and then link it to a Westpac Choice account and make at least five eligible payments using your debit card. Please consult your bank as to what an eligible payment is. 

What are the two types of NAB locked savings accounts?

With a locked savings account in NAB, you can earn bonus interest and learn financial discipline. NAB offers two types of locked savings accounts, each with their own terms and conditions.

The NAB Reward Saver account pays a variable base interest rate of 0.05 per cent per annum and a bonus interest of 0.55 per cent. You’re eligible for the bonus if you make a minimum of one deposit on or before the second last banking day and have no withdrawals in the month.

Meanwhile, the NAB iSaver account provides 0.05 per cent as the standard base interest rate and a fixed bonus margin of 0.55 per cent during the first four months from the date of opening the account. You can park your cash in the account and enjoy unlimited monthly transfers between linked daily bank accounts without impacting the interest rate.