In this article:
- If your child is likely to attend an overseas university, you must account for both the cost of the education and the currency in which you will eventually pay for it.
- It makes sense to start saving in that currency today.
- The best way to do that is to start building an offshore portfolio.
- The timeframe matters too.
- You can’t control what happens to the rand or precisely how markets will perform.
- You can control how appropriately the portfolio is invested for the remaining timeline.
- Before you open an investment, make sure you understand the costs.
- International does not automatically mean better.
It’s not uncommon for young South Africans to go overseas for university. Sometimes it comes down to their chosen field and going where the best expertise is. Some want an internationally recognised degree and the opportunity to build a global network, particularly if they may one day want to emigrate. For others, studying abroad is simply an opportunity to experience another part of the world and broaden their horizons. Whatever the reason, it can be extraordinarily expensive when you’re earning and saving in rands but paying university fees and living costs in pounds, dollars or euros. If you want your child to have that option when they finish school, you need to think carefully about how you invest for it now.
Start with the currency
Young people today are global citizens. It is no longer unusual for them to want to study overseas.
The challenge for South African parents is that the rand (already not exactly famous for its strength) is likely to lose value against major currencies over the long term. South Africa’s average inflation rate is around 4% to 6%, compared with roughly 2% to 3% in the US. That difference tends to translate into the rand depreciating against major currencies such as the US dollar.
That is not necessarily because South Africa is a bad country. But it reflects our socioeconomic circumstances.
Read more: How to save on tax and executor’s fees in South Africa without opening a trust
If your child is likely to attend an overseas university in 12 years, for example, you must account for both the cost of the education and the currency in which you will eventually pay for it. Universities such as Oxford, Yale or MIT are already expensive. A weaker rand adds another layer of risk.
You could calculate the amount you need based on today’s costs and exchange rate, invest towards that target in rands and still find yourself underfunded if the rand has a particularly difficult 12 years.
If you expect to pay the future expense in a hard currency, it makes sense to start saving in that currency today.
Build an offshore portfolio
This means converting rands into pounds, dollars or euros, depending on where your child might study, and investing the money through an international platform.
You may not know precisely where your child will go. They may not know yet either, especially if they’re still young. But you can still build an offshore portfolio in a major currency rather than leaving the full goal exposed to movements in the rand.
The rand-dollar exchange rate can be almost as volatile as investing entirely in equities and your child’s education is too important a goal to leave unnecessarily exposed to that volatility.
Watch: What most South Africans get wrong about offshore investing
South Africans can currently convert up to R2 million into hard currency per calendar year as part of their Single Discretionary Allowance (SDA), and another R10 million as part of their Approved International Transfer (AIT). For a family investing over 10 or 12 years, that gives you time to build the offshore portfolio gradually.
Let the timeline guide you
The currency is only one part of the decision. Your investment horizon should also determine how you invest.
If university is still 10 to 15 years away, you have time to invest for growth. As the date gets closer, however, you will need to reconsider the level of risk you’re taking. Your asset allocation (the way you combine equities, property, bonds and cash) should reflect how long you have until you need the money.
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These are all factors you can control. You can’t control what happens to the rand or precisely how markets will perform. You can control how appropriately the portfolio is invested for the remaining timeline.
The longer the investment period, the more important it is to make a sensible decision early. You can adjust the portfolio as circumstances change, but you can’t recover time that has already been lost.
Understand the product and its costs
Before opening any investment, ask for the effective annual cost, or EAC, breakdown. Anyone presenting an investment proposal should legally disclose it.
This will help you distinguish between a transparent, understandable investment and an expensive policy-based product. Some education policies make attractive promises or include insurance benefits that pay out if you die or become disabled. But those benefits have a cost, and insurance companies are commercial businesses, not charities, so these products are rarely designed for you to win
I would rather retain more control over the outcome. That means focusing on the investment elements we can manage: asset allocation, tax efficiency and costs. A properly structured endowment may, for example, help shelter investment growth from tax in the right circumstances.
Be just as careful when considering overseas products. International does not automatically mean better. Complicated policy wrappers and expensive products are sold in offshore markets too.
If a product is difficult to understand or comes with too many “if this, then that” conditions, that may be your answer. Don’t overpay for something that promises the world but is unlikely to benefit you.
You may not need the full amount
You may ultimately be unable to fund every cent of an overseas education, and that’s okay.
Your child may qualify for a bursary or scholarship. They may be able to work part-time, or you could use a loan to cover the difference. Your investment doesn’t have to solve the entire problem to give them more choices.
Having the option to complete their tertiary education overseas is a wonderful gift to give your child. But how you save for it is just as important as whether you save for it. Match the currency to the likely expense, invest according to your timeline and pay close attention to tax and costs. Most importantly, choose an investment you understand and retain control over the factors you can control.
This article is for educational purposes only and does not constitute financial advice.
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