Education is one of the largest expenses many families face, and its cost has often risen faster than general inflation. Planning early turns a daunting future bill into a manageable monthly saving. The process is straightforward: estimate what education will cost when it is needed, work out how much to save, choose suitable investments for the time horizon, and review regularly.
What you will learn
- Estimate future education costs using an education inflation rate
- Calculate the monthly saving or lump sum needed
- Choose investments that match the time to the goal
- Adjust the plan as the goal approaches
Step 1: Estimate today’s cost
List the costs of the education you are planning for, in today’s prices:
- Tuition and admission fees.
- Accommodation and living costs, if studying away from home.
- Books, devices, transport and exam fees.
- For study abroad: travel, visas, health insurance and exchange rate effects.
Research current fees at a range of institutions — public and private, local and overseas — since costs vary widely.
Step 2: Project the future cost
Future cost
Future cost = Today's cost × (1 + education inflation rate)^years
Worked example: projecting the cost
Parents estimate that a degree programme costs 1,000,000 in today’s money. Their child will start in 15 years, and they assume education costs rise 8% a year (illustrative figures).
Future cost = 1,000,000 × 1.0815 = 3,172,169.
The cost more than triples. Using general inflation instead of a higher education-specific rate could leave a large shortfall. The inflation-adjusted savings calculator shows the effect of different rates.
For study abroad, also consider that the local currency may weaken against the currency of fees — see exchange rates.
Step 3: Calculate the saving needed
Worked example: monthly saving versus lump sum
To accumulate 3,172,169 in 15 years with an expected return of 9% a year, compounded monthly (illustrative figures):
- Monthly saving: about 8,383 a month for 180 months (a future value of annuity calculation).
- Lump sum today: 3,172,169 ÷ 1.0915 ≈ 870,881.
Total monthly contributions would be 8,383 × 180 ≈ 1.51 million — less than half the target — because returns do the rest. Starting five years later would require much higher monthly savings. Try the education savings calculator and savings goal calculator.
If 8,383 a month is not affordable, the options are to start with a smaller amount and increase it each year with income, accept a less expensive education plan, or combine savings with scholarships, part-time work or education loans later.
Step 4: Choose where to invest
The right mix depends on how far away the goal is:
| Years to goal | Typical approach |
|---|---|
| More than 10 | Mainly growth assets such as diversified equity funds, plus some fixed income |
| 5–10 | A balanced mix of equities and fixed income |
| 2–5 | Mostly fixed income and deposits; reduce equity exposure gradually |
| Under 2 | Safe, accessible savings and deposits maturing when fees are due |
Gradually shifting from growth assets to safer ones as the goal approaches — a glide path — protects the fund from a market fall just before fees are due. See diversification and asset allocation and mutual funds and ETFs. For shorter horizons, recurring deposits are a disciplined option — see FDR and DPS.
Several children or several stages
Families often plan for school fees, university and sometimes postgraduate study for more than one child. Treat each as a separate goal with its own date and amount, and prioritise:
- Your own emergency fund and insurance, so a crisis does not derail all goals — see emergency fund.
- Near-term education costs.
- Longer-term goals, including your own retirement. Children can borrow for education; it is much harder to borrow for retirement.
Protecting the plan
If the main earner dies or becomes unable to work, education savings could stop. Term life insurance sized to cover outstanding education goals protects the plan — see insurance basics.
Review regularly
Each year:
- Update cost estimates and inflation assumptions.
- Compare savings with the target path.
- Increase contributions with income.
- Rebalance and adjust the asset mix as the goal approaches.
The power of starting early is explained in compound interest.
Common mistakes
- Using today’s fees without allowing for inflation.
- Starting too late, when the required saving becomes unaffordable.
- Keeping long-term education savings entirely in low-yield accounts — or keeping short-term savings in volatile investments.
- Prioritising education saving so heavily that retirement saving stops.
- Not insuring the earner whose income funds the plan.
Key terms
- Education inflation — the rate at which education costs rise over time.
- Future value — the value of money at a future date after growth.
- Glide path — gradually reducing investment risk as a goal approaches.
- Sinking fund — regular saving for a known future expense.
- Term life insurance — insurance paying a sum if the insured person dies during a set term.
Frequently asked questions
What inflation rate should I use for education costs?
Look at how fees for your target institutions have risen in recent years; many planners use a rate higher than general consumer inflation.
Is it too late to start saving if my child is already a teenager?
No. Use safer investments for the short horizon, save as much as possible and consider supplementing with scholarships or loans.
Should I save in my name or my child’s name?
It depends on local rules on accounts for minors, taxes and control of the money. Check the options available from banks and regulated providers.
Key takeaways
- Project education costs with an education-specific inflation rate: today’s cost × (1 + i)^years.
- Calculate the monthly saving or lump sum needed using expected returns.
- Match investments to the time horizon and reduce risk as the goal approaches.
- Protect the plan with insurance, review it yearly and keep saving for retirement too.