Even a public school education can add up over time, especially when you take extra curricular activities into account. The Australian Scholarships Group estimates it costs more than $100,000 to put a child through public primary and secondary school on average. For a private school you will need to budget more than two and a half times this amount. This estimate includes allowances for extra curricular activities like fundraising, uniforms, camps, and sporting equipment. 

With costs like these it pays to plan ahead

What do you need to consider when assessing education investment plans? Here are a few important issues:

• Flexibility - many savings plans targeted at education have restrictions on when you can get your money out. This can be an important consideration if you need to get your hands on your money for purposes other than education.      
• Investment horizon - looking at the education costs above, the earlier you start the better your chances of meeting your goals are. Saving for education is just like any long term investment strategy - it pays to plan ahead. This way you won't be scrambling for money or having to go without when the time comes to start paying the fees.
• Choice of investment strategies - you need to make sure the investment strategy you choose is suitable for your investment horizon, goals and attitude to risk. Some education plans have a limited investment menu and may exclude exposure to some asset classes, such as shares for example.      
• Costs - the fee structures on some education savings plans can be confusing. Make sure you understand all the fees you are paying including any penalty costs for withdrawing your money early.  
• Tax - the Government imposes a special tax on investments held in a child's name so be careful how you structure your plan. Some funds allow you to open an investment in a child's name with an adult acting as trustee. Your tax or financial adviser can advise the most tax-effective way to structure your investments for your particular circumstances.  Some Friendly Societies offer scholarship plans which qualify for tax concessions under the Income Tax Assessment Act providing the funds are used for education purposes. Make sure you understand the restrictions on these types of funds before you invest.
• Simplicity - before you start any investment strategy you should make sure you understand it. A professional financial adviser can help   

Why consider indexing?
There are a number of reasons why indexing can be a viable investment alternative to many education plans on offer. 

Low costs, tax-effectiveness and diversification, the hallmarks of an indexing approach, can be a powerful strategy for longer term investment goals like education.  

Indexing's 'buy and hold' approach can significantly reduce the cost of investing over time. Indexing takes advantage of capital gains discounts and the deferral of capital gains liabilities, which can improve after-tax returns for investors. This combined with low management costs means you can keep more of the returns you earn. Because index funds invest in all or most of the securities in an index, they provide diversification, which means lower risk.

Vanguard's Investor Index Funds offer a flexible investment solution with low fees, no upfront fees and scaled management costs. In fact, our funds have costs around half the industry average. Once you've opened your investment with $5,000 or more, you can use BPAY to start a regular investment plan with as little as $100 a month.

While we like to promote indexing as a long term investment strategy, sometimes life doesn't always go according to plan and you may need access to your money earlier than you thought. With Vanguard's index funds, you can access your money when you need it, or you can change investment options if your needs change.  Best of all, there are no switching costs other than the usual buy sell spreads. 

How it works
The following example illustrates the power of regular investing and compound returns over time. It also shows how indexing can be a tax effective alternative to more traditional savings plans. 

In this example, two couples have an investment timeframe of around eight years before they will need to draw on their capital. James and Kelly decide to invest $10,000 in Vanguard's LifeStrategy Growth Fund when the fund started in October 1998. Because they have a reasonably long timeframe before they will need to start accessing their assets, they decide to invest in a diversified fund with a bias towards growth assets.  Mark and Amelia take a more conservative approach investing $10,000 in a cash management account. Both couples decide to add $400 to their investment at the end of each month.   

Both couples have decided to maintain their savings plans after the eight year timeframe. They will simply drawdown the amount they need when they need it but keep up their $400 monthly contributions.

Smart Investing
By Robin Bowerman
22 December 2006
Principal & Head of Retail, Vanguard Investments Australia
www.vanguard.com.au