Saving for Private School Fees

RedOnion said:

Hi Steven,
You're suggesting that there are risk adjusted, after tax returns of in excess of 3% available, if recommending this approach. Have I understood correctly?

If you have, I'll have to get in touch with you. I've some money to invest, but I also have the option to borrow a large lump sum at 3% which sounds like a no-brainer to use for investment.

Red

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There is a balancing act right? It makes sense to overpay your mortgage, but you can't pay school fees with a part of your house equity.

So if you need fees in 10 years, you'd have to stop overpaying at 10-T years to allow you build up the excess cashflow from reduced mortgage payments to have the pot to start paying your fees at 10 years.

I would start with a blended approach with the target of working out how much can I save each month (2,400), based on this the OP can fund the annual fees roughly from savings. I would then suggest at the starting point (8 years) to have 3 years of fees (39,000) to start. That translates to saving 406 per month. Leaving roughly ~2,000 per month to fund overpayments, pension AVCs etc. I would then use a portion to overpay the mortgage knowing that in 8 years you will have lower mortgage payments which will help increase the ability to fund the fees from monthly cashflow.

I would monitor annually and adjust as circumstances change. Whilst, it may not be the most efficient way to maximize from a purely mathematical approach, it allows the flexibility of life to be factored in.

RedOnion said:

Hi Steven,
You're suggesting that there are risk adjusted, after tax returns of in excess of 3% available, if recommending this approach. Have I understood correctly?

If you have, I'll have to get in touch with you. I've some money to invest, but I also have the option to borrow a large lump sum at 3% which sounds like a no-brainer to use for investment.

Red

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No I'm not. How can I predict what future market returns are going to be? Over the last 10 years, you would have certainly done better by investing your money but you cannot say that because the last 10 years were great the next 10 years will be too.

The OP is planning for an expensive time in her life and wants money in the bank to secure it. I calculated her mortgage is currently €1,232 a month. If she overpays it by €820 a month (I know they are on fixed term at the moment). at the end of 8 years, the mortgage will reduce to €765, saving them €467 a month in repayments or €5,604. Realistically they will have to do this a year out from secondary school to have enough cash for year 1, so their mortgage will be higher (don't have time to redo the figures).

What if she or her husband are made unemployed or have a reduced income when school fees come around? The reduced mortgage will take pressure off the mortgage repayments but it won't help them pay for their kids to go to school.

Not everything has to be mutually exclusive, they do have the choice of a little from column A and a little from column B.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Dublinbay12 said:

There is a balancing act right? It makes sense to overpay your mortgage, but you can't pay school fees with a part of your house equity.

So if you need fees in 10 years, you'd have to stop overpaying at 10-T years to allow you build up the excess cashflow from reduced mortgage payments to have the pot to start paying your fees at 10 years.

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I agree to an extent about the balancing act, when it comes to most people.
But we're looking at a specific case here, not most people.

The OP currently has free cash flow of 2,400 per month, and a mortgage payment of c. 1,200.
They don't actually need to save at all, as their cashflow will be enough to fund their children's education. So overpaying their mortgage makes sense.

Overpaying mortgage actually makes sense for a lot of people, but the psychological side of having a savings pot stops them doing it. Take a PTSB mortgage as an extreme. You can overpay, and just leave the funds sitting as a credit. Then when you need to divert money elsewhere, you just stop paying the mortgage, and the credit gets used up.

Something that people overcomplicate is the idea that they have to have the entire education fund saved up by the start date. This isn't the case at all. Private school and college is a cost spread out over 10 years. So you either try to save up the total amount before, or remove (or reduce) all of your other outgoings before the cost start so that you can find from free cash flow.

SBarrett said:

Not everything has to be mutually exclusive, they do have the choice of a little from column A and a little from column B.

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I completely agree.

With respect (and I do have a lot of respect for you), I picked up on the 'get the money working for you' comment in your original post, which just comes across as sales person speak. I stand by my comments that overpaying the mortgage is the best way to get their money working for them, in this case.

I think some of the advice ignores the OPs current savings of 2,400 per month. They could theoretically completely clear their mortgage in 8 years at that rate, which wouldn't be a bad position to be in. But that's extreme, and shouldn't be taken at the expense of under funding pensions, having an emergency fund, or living.

As for losing a job - I think in that scenario, regardless of whether savings have been earmarked for education or not, a reality check needs to come into play regarding private education.

Hi OP,

It may be financially better to overpay your mortgage, but I would have an education fund too. You just don't know what's around the corner and it would be awful to have to pull the kids out of school if the funds are not there... Maybe an education fund = 2 years' fees or something?

The OP has an excess of income of expenditure of €30k a year. His fees will be, at most, €14k a year.

Unless he anticipates problems, then he does not need a separate education fund, much in the same way as he does not need a separate beer fund or a separate holiday fund.

It would be very different if he had an excess of income of €5k a year and fees of €14k a year. He would have a deficit of €9k a year for a few years and would need a fund to finance that. Or if it were a long way away, he could pay down his mortgage, but that would be a complicated calculation and balancing act.

And as Red points out, if his financial circumstances deteriorate, he needs to review if he can afford a private school.

Brendan

Brendan Burgess said:

And as Red points out, if his financial circumstances deteriorate, he needs to review if he can afford a private school.

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Hi Brendan,
If sending their kids to a private school is very important to the OP, then, imo, putting money aside for this would be prudent. Not from a financial perspective, but for piece of mind. If the OP goes through hard times when the kids are in private schools, at least they won't have to pull them out. If the OP is saving 30k a year - we are only talking about 1 year's savings. If it's obvious that the fees are not a problem when the kids are in the schools, by all means pay down the mortgage then.

Brendan Burgess said:

Unless he anticipates problems, then he does not need a separate education fund, much in the same way as he does not need a separate beer fund or a separate holiday fund.

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You don't have a beer fund?

The kids will not be starting in private schools for 6 years.

He does not need peace of mind.

If the world collapses for him in the meantime, he can send them to a state school.

If the world looks a bit uncertain with a year to go, he can then create a fund.

I wonder if this is a Covid issue? I have seen a lot of people making bizarre financial plans, in case something very unlikely might happen. It's as if there is an anxiety which I had not noticed before.

Brendan