Step 1
Identify the school you would like your child to attend and what years you would like them to attend.

Step 2
Calculate the total cost for the period of time your child will be in a private school—tuition fees and all the extras—assuming an increase in fees each year of 7% and an increase in inflation each year of 3.5%.

For example, using our 2006 school tuition fee costs from our table in Chapter 3, the total fees for a child starting Year 1 in a Melbourne-based private school in 2007 would be $192,900.
Year Fees
Year 1 2007 $12,000
Year 2 2008 $12,000
Year 3 2009 $13,000
Year 4 2010 $14,000
Year 5 2011 $15,400
Year 6 2012 $15,500
Year 7 2013 $17,000
Year 8 2014 $18,000
Year 9 2015 $18,500
Year 10 2016 $18,500
Year 11 2017 $19,000
Year 12 2018 $20,000
TOTALS $192,900

So, the average cost of private school tuition fees for a child beginning Year 1 in 2007 and completing Year 12 in 2018 (assuming an average increase of 7% per year—not taking into account inflation ) would be $341,000 .

However, if your child started at a private school from Year 8 in 2007 and went through to Year 12, total tuition fees = $125,500

If your child was starts school in Year 1 in 2011 and goes through to Year 12, total tuition fees = $446,900 .
Again, if your child started at a private school from Year 8 in 2011 and went through to Year 12, total tuition fees = $164,500

Again, see my online calculator at www.privateschoolfees.com.au to assist you with these calculations. It will take into account the indexation for inflation and school fee rises for whatever year your child begins school.

Step 3
Choose your asset class and investment strategy that applies to your situation.

Strategy 1 – A simple savings plan
That’s right. Hate to keep reminding everyone of the investment basics but for some reason most people do not know how to save. Australians have had a negative savings pattern for the last 10 years. We are simply not saving and we are spending far too much on consumables.

This strategy requires you to start early—as soon as your child is born. A savings plan is the simplest way to save money. The best way to do this is to create an automatic payment that comes out of your everyday account once a month, straight after pay day, and into your chosen investment.

You will be what they refer to as ‘paying yourself first’.

What if I have no savings at all?
However, if you have nothing saved at all and you need to start from the beginning, your best option is to invest in a managed fund. It is the same principleal as a savings account, you organise a direct debit of a set amount to come out of your account each month that goes into the managed fund.

Which managed fund?
As mentioned previously, the best shares to buy are Industrial shares, therefore the best managed fund to choose is an industrial shares managed fund that pays you as many franking credits as possible.

A note:
• Don’t pay entry fees.
• Do consider using two or three different managed funds, and diversify your risk with each fund manager.

We have looked at the past, present and future fees associated with private school fees and started to think about at what stage you will send your child to private school—preschool, kindergarten, primary or secondary. In this chapter we will look at the average cost of private school fees as well as additional costs or the ‘extras’ you should expect to pay for when your child is attending a private schooling.

In order to provide you with a baseline to look at the investment you are about to make in your child’s future, we will look at an average of the fees of schools in different Australian states.

Below I have calculated average private schools fees for each state in terms of costs in the 2006 school year. These figures include fees from Year 1 through to year 12—so 13 years of tuition in total. These figures do not include boarding fees.

To calculate these fees, I have chosen a few private schools randomly from each state capital city. They have been chosen only on the basis that they show a cross-section of fees, not for reasons of academic status or religious affiliation.9

These figures are averages, but bear in mind that fees for regional private schools in your state will generally be less than the amounts I have quoted. School fees in the ACT are lower than New South Wales and Victoria, but slightly higher—by approximately 15%—than their counterparts in Queensland and Western Australia. Quite notable also is that fees at many girls schools are slightly lower than those at boys schools.

Cost of school fees in state capital cities in $‘000s in 2006
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12
NSW $12 $12 $13 $14 $14.5 $15 $16 $18 $19 $20 $20.5 $20.5
Vic $12 $12 $13 $14 $14 $15 $16 $18 $18 $19 $20.5 $20.5
Qld $8 $8 $8 $9 $9 $9 $10 $11 $11 $12 $13 $14
SA $8 $8.5 $9 $10 $11.5 $12 $12 $14 $15 $15 $16 $16
WA $8.5 $8.5 $9 $10 $11 $11 $11.5 $13 $13 $13.5 $13.5 $14

Note: These fees are tuition fees only. They do not include boarding, extra-curricular activities or uniforms.
At the time of finishing this book, I was anxious to see the headlines of schools increasing fees and was certain we were going to break the $20,000 tuition fee for more than a few schools, and we certainly did breeze through that level.

•
Generally speaking, a comparison of the cost of living is a good indicator of the comparison of school fees in each state so, as we found in the table above, the cost of private schooling in South Australia, Western Australia and Queensland is lower than in News South Wales and Victoria, and the cost of living is lower in these states too.

In New South Wale and Victoria the fees can vary much higher than reported. In Victoria, kindergarten fees are as high as $13,500 per annum in one particular school, through to year 12 fees of $20,500 . In terms of cost towards the higher end of town, it should be of no surprise Melbourne and Sydney rank closely, so, for greater accuracy, I have grouped these two states together. In an averaging approach, and taking both genders into consideration, the average cost of sending your child today to a private school in New South Wales and Victoria or South Australia, Western Australia and Queensland in 2006 are as follows:

Average cost of school fees in 2006
Vic and NSW Qld, SA and WA
Kindergarten $10,500 $7,500
Year 1 $12,000 $7,500
Year 2 $12,000 $8,000
Year 3 $13,000 $8,000
Year 4 $14,000 $9,000
Year 5 $15,400 $9,000
Year 6 $15,500 $10,500
Year 7 $17,000 $11,000
Year 8 $18,000 $11,500
Year 9 $18,500 $12,500
Year 10 $18,500 $13,000
Year 11 $19,000 $13,000
Year 12 $20,000 $13,500

Note: These fees are tuition fees only. They do not include boarding, extra-curricular activities or uniforms.

The real wake-up call to extra fees is the move from Year 6 to Year 7. This increase can shock parents. It can be as much as 30%, so be prepared.

As mentioned in Chapter 1, the most rapid increase in private school fee rates has been occurring in the last few years—typically a trend of 7% per annum. That rate rise is more than double the Reserve Bank of Australia’s rate of inflation of 3%. This rate rise is not only evident in primary and secondary private schooling but is also affecting kindergarten fees. When researching this book, I noted some private schools increased fees as much as 16% for kindergarten from 2004 to 2005. In real dollar terms this was an increase from $9,304 to $10,800 in just one year.

But before you go saying well it’s not really worth it, and the money saved by not sending our child to those early years can be saved for senior school, be mindful. Those early development years in Year 1 though to Year 4, present the most important leaning development times. These formative years are when children develop education habits and a love of learning that can stay with them forever. You need to really consider what curriculum has been put in place by private schools before making that decision.

Can you really see any reason why the cost of schooling will slow down in the future? So just accept the pricing and prepare yourself for this expensive school fee ride.

To work out the cost of fees for your chosen school, refer to my website www.privateschoolfees.com.au. It will take into account the indexation for inflation and school fee rises for whatever year your child begins school.

Again I must stress the above table is for tuition fees only. We will visit extra costs below.

Most people have a mortgage and this may seem to be a hurdle to start saving. It needn’t be.

This strategy will demonstrate how you can reduce your mortgage and build an investment portfolio at the same time.

All about debt
Firstly there are two types of debt: good and bad. That’s it, just two types of debt. As you can tell by the name, good debt isn’t necessarily a bad thing, as I will explain.

Bad debt, for example, is your home loan, personal loans, credit cards and store cards. It is referred to as bad debt because this debt is non-deductible. That is, you cannot claim a tax deduction on it on this type of loan. Good debt however, is what you should always aim to have. It is a tax deductible, investment loan used to acquire an asset such as direct shares, managed funds or other growth assets.

Don’t borrow against your house to pay for the school fees. This will again be ‘bad debt’. Start now with an investment loan with the available equity in your home.

Most people wait until the have paid off their home loan before they commence investing in other assets. Why? Why miss out now on all those growth assets currently going on in the market place?

One strategy for doing this is debt recycling.

How does debt recycling work?
If you have available equity in your home, that is, you have paid-off enough of your loan, you can then be taken out—or drawn down—from the bank the amount equal to the equity in your home. For example, your home is valued at $500,000. You have paid off $200,000 so your outstanding mortgage is $300,000. This means the available equity in your home is $200,000.

This available equity can then be drawn down as a loan against your home. In this example, say you decide to borrow a $100,000 against the $200,000 available equity. This $100,000 would then be invested into an investment portfolio.

Then as you receive the income from that investment, you place that money back into your home loan with the major aim to reduce the mortgage (ie., the bad debt.)

The crucial element
As you reduce your home loan, you concurrently increase your investment portfolio loan (ie., good debt) and add the new available funds into your investment portfolio. The investment portfolio is increasing as your mortgage is decreasing.

Overall the debt recycling strategy is reducing your home debt (the bad debt) by investing available funds of your home into an investment fund (an investment loan is used—good debt) then paying the income earned from the investment back into your home loan account. Every year you repeat the process. As your home loan balance reduces you increase your investment loan by the same amount.

The available funds must be invested and especially into growth assets—such as Australian industrial shares. As your capital grows and the income also increases with each year, the franking credits income received go directly go back into the mortgage (the bad debt) to keep reducing the home loan, year after year.

As you are reducing your home loan debt and increasing your investment loan the returns on your investments are compounding every year. As you are invested in an industrial share fund with increasing income this will play wonderfully in your favour.

A managed fund, also known as a unit trust, is simply where you pool your money with other investors into a single fund. The fund has a fund manager who will invest on your behalf. The fund manager is then able to spread their accumulated buying power across a number of different investments.

A fund manager accepts the worry over the investment—that’s what they are paid for. When the share market falls heavily they can be more level-headed than you are in how to handle a share market melt down. There are many other advantages of using a fund manager. They may be able to buy certain shares or be able to participate in an IPO (an initial public offering, commonly known as a share float) that you could not do as an individual investor.

A major advantage of a managed fund is that if you only have a small amount of money to start investing you can still buy shares through a managed fund and keep adding to it as part of your savings plan on a regular basis. Investing in a $500 block in a share parcel doesn’t offer strong returns, however by using a fund manager and investing $500 per month in that fund you will not only increase your share holding, you will also benefit from dollar cost averaging. Dollar cost averaging is investing a fixed dollar amount on a regular basis, in order to smooth out the volatility in the marketplace.

Managed funds do attract fees known as management expense ratios (MER) and some managed funds may also charge entry and exit fees. Like any investment, there is also no guarantee that a fund will make you money and always remember that past performance of a managed fund is no indication of its future performance.
(Suggested alternate text)
Managed funds do attract both direct fees (charged directly against the account) and indirect fees (not charged against the account but against the gross investment return) and may also charge entry and exit fees and fees for certain transactions. Like any investment, there is also no guarantee that a fund will make you money and always remember that post performance is no indication of future performance.
Compounding
Now here comes the power of being an investor and not a trader—the power of compounding.

The key thing in investing is that you must reinvest your returns. The income your investment produces needs to keep working for you for as long as possible before you need to take the cash out.

This may be difficult as you may intend to place your child in preschool and this means your investment is only working for five years from the birth of your child. Of course an investment compounding for 10 years or more is going to yield a better result.

As a parent, it is your duty to make financial education a regular dinner conversation in your home. You need to practice it and your children need to learn how to budget and save.

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10 Yr 11 Yr 12
NSW $12 $12 $13 $14 $14.5 $15 $16 $18 $19 $20 $20.5 $20.5
Vic $12 $12 $13 $14 $14 $15 $16 $18 $18 $19 $20.5 $20.5
Qld $8 $8 $8 $9 $9 $9 $10 $11 $11 $12 $13 $14
SA $8 $8.5 $9 $10 $11.5 $12 $12 $14 $15 $15 $16 $16
WA $8.5 $8.5 $9 $10 $11 $11 $11.5 $13 $13 $13.5 $13.5 $14
Note: These fees are tuition fees only. They do not include boarding, extra-curricular activities or uniforms.
At the time of finishing this book, I was anxious to see the headlines of schools increasing fees and was certain we were going to break the $20,000 tuition fee for more than a few schools, and we certainly did breeze through that level.

•
Generally speaking, a comparison of the cost of living is a good indicator of the comparison of school fees in each state so, as we found in the table above, the cost of private schooling in South Australia, Western Australia and Queensland is lower than in News South Wales and Victoria, and the cost of living is lower in these states too.

In New South Wale and Victoria the fees can vary much higher than reported. In Victoria, kindergarten fees are as high as $13,500 per annum in one particular school, through to year 12 fees of $20,500 . In terms of cost towards the higher end of town, it should be of no surprise Melbourne and Sydney rank closely, so, for greater accuracy, I have grouped these two states together. In an averaging approach, and taking both genders into consideration, the average cost of sending your child today to a private school in New South Wales and Victoria or South Australia, Western Australia and Queensland in 2006 are as follows:
Vic and NSW Qld, SA and WA
Kindergarten $10,500 $7,500
Year 1 $12,000 $7,500
Year 2 $12,000 $8,000
Year 3 $13,000 $8,000
Year 4 $14,000 $9,000
Year 5 $15,400 $9,000
Year 6 $15,500 $10,500
Year 7 $17,000 $11,000
Year 8 $18,000 $11,500
Year 9 $18,500 $12,500
Year 10 $18,500 $13,000
Year 11 $19,000 $13,000
Year 12 $20,000 $13,500

The real wake-up call to extra fees is the move from Year 6 to Year 7. This increase can shock parents. It can be as much as 30%, so be prepared.

Jonathan Cattana: Which asset class should I invest in and why?

Step 1 of our game plan to pay for private school fees is to determine the best asset class to invest in based on your circumstances and goals. This is step one in the two-step game plan that will help you bring the overall strategy together when we work through the next chapter.

You could well ask ‘just tell me straight off, what asset class and how do I use this asset to get to my end goal?’  But before making any investment decisions, it is always prudent to ask yourself: What am I investing in? What is the asset, and what returns can I reasonably expect? Therefore it is important to ensure you understand a bit more about what we are investing ‘in’.

First, let’s look how the asset class of cash performs.

Cash               

Of all the asset classes this is the worst performing in terms of investment growth. There is virtually no growth with cash investments. Savings accounts offer minimal or no interest and any interest they do offer is outweighed by account fees. As we all know, cash is easily accessible, accepted everywhere and useful for purchasing goods, paying for services and to survive day-to-day.

However, as a saving vehicle, cash does not generate enough growth to provide future income for goals such as funding private school fees. In the Australian banking system, there is an excess of cash just sitting in the banks and cash management trust, most of them earning very little interest. If you leave your savings in cash, you better watch out for inflation.

For example, if you left $10,000 in cash in a bank account in 1995, inflation over the period 1995 to 2006 would have eroded your purchasing power to $7,831. (That’s a loss of 21.7%. So, unless you earn more than inflation, your wealth is essentially going backwards. You need to invest your cash that is not earmarked for short-term goals into other asset classes.

Fixed interest

Some fixed interest investments will produce a steady, regular income return, but their main problem, like cash investments, is limited growth. A fixed interest fund manager will invest your money into an array of corporate infrastructure projects, government bonds and bank bills. Other examples of fixed interest include structures like convertible notes and floating rate notes.

I recall many discussions with investors telling me that investing in fixed interest is safe and they can’t lose money. This is not always correct. Ask those investors who looked for the high interest rate returns from investing with Pyramid Building Society, Victoria’s largest building society and Australia’s second largest, in the late 1980s and early 1990s, their investments are gone.¹⁰ Ask those who may have been holding corporate bonds from previous entrepreneurs whose company may not be able to pay their coupon interest and therefore defaulted on their obligations.

I am highlighting these examples to prove that you can lose your capital on fixed interest investments. Investors also misunderstand the higher yield catch. A higher yield means higher risk. If it’s too good to be true, it probably is. For example, a debenture paying a high yield of 11% is being invested in riskier property building projects than the banks may want to be involved with. Some debenture companies take on this riskier project and therefore are required to pay out a higher yield in order to attract investors.

For our purposes, however I don’t recommend investing your cash in fixed interest investments. The previous generation preferred fixed interest investments because they could depend on the regular monthly income, and they were happy with that. As our goal is to find an asset that will generate enough income to pay for our yearly private school fees bill, we need assets that produce a stable and growing income together with some growth to protect our capital base.

If we need our original capital base (our initial investment) to grow, we need to invest in growth assets. When we want our investment to go from $10,000 to $50,000 over a number of years, it requires a growth factor to get us there. The growth component of our return moves the value of our portfolio upwards in value.

Now I’ll show you some growth assets.

Jonathan Cattana Avestra Private Wealth

Avestra Global