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.

Direct investing
If you have a lump sum and are considering a tailored direct share portfolio, you will need between 15 and 25 stocks, seeking advice would be strongly recommended. There is a lot to consider and learn.

Where possible, invest any additional cash from work, such as bonuses or an inheritance, straight into the savings plan. Ensure that the income from the investment is being reinvested so that it’s compounding and the franking credits are returned back to the plan so that the income stream is added to the overall saved amount.

If you require a savings calculator see www.infochoice.com.au and look under the banking section. Please note, this calculator gives an indication only. An exact figure requires advice from a financial adviser.

It’s amazing how easy this strategy is, but how many people have not yet this plan into action.

Let’s look at a case study.

Case study 1
Names Mary and Phil Evans live in Melbourne
Number of children They have one daughter, Theresa, who will begin school in 2011
Age Theresa turns 2 at the end of 2007
Total family income per annum $110,000
Employment Phil has his own business and seven employees at his manufacturing plant. Mary is an architect and works from home part-time.
Education strategy The goal is to send her to a private school from kindergarten to Year 12.

Strategy choice Simple savings plan
Current savings set aside for schooling $20,000
Figures supplied by MLC Limited

Step 1
Identify the school
Mary and Phil have chosen a Catholic private school in the suburbs of Melbourne and wants to send herim there from kindergarten, all the way through to Year 12.

Step 2
Calculate the cost of tuition and extras
Theresa’s date of birth is 31 November 2005 and she will start kindergarten when she is five years old in January 2011. Theresa will finish Year 12 in 2023.

From the research they’ve done, Mary and Phil have found out that currently the tuition fees for the school are $24,500 a year and they have worked out that the total fees will be $328,000 .

Step 3*
Choose the asset class
Because Mary and Phil have already saved $20,000 for Theresa’s tuition fees, they have chosen to make adopt a regular savings plan and invest in industrial shares, which have a growth rate of 5%, will provide income of 5% and a franking credit rebate on their portfolio of industrial shares of 80%.

Based on these assumptions, the amount that is required to save every month is $870 .

Note: If this is the only child for Mary and Phil, they may wish to consider to stop saving in year 2023 and then sell the down their investment portfolio.

However, by then, Mary and Phil may decide to continue on with the savings plan for Theresa’s university fees or other needs.

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.

The decision to send your child could to a private school will be driven by many issues and there are several things you need to take into account like:
• personal preferences
• religious beliefs.

However the most important issue for most people is financial. For many parents, their financial situation and the amount of time they have available to save for school fees determines if it is possible for them to send their child to a private school.

To help you determine whether or not to send your child to a private school here are some things you should think about. Take a moment to consider the following questions.

Question Your comments
Is religious denomination a major issue?
Do you plan to have more children?
What extra cash do you have that is not budgeted?
Is it important to have regular holidays away?
Is lifestyle expenditure important to you such as eating out regularly or updating your car every few years?
What equity do you have in your own home?
Are there unnecessary financial liabilities that you can remove completely or at least reduce?
What expenses can you reduce quickly over the next three years (for example, car loan)?
What level of security do you have with your current job/income level?
What are your current debt obligations and are they onerous?
Are there other possible sources of income you can draw upon. For example, inheritances, gifts from grandparents
Do you already have a savings plan?

When is the right time?
In Chapter 1 we looked at the stages of schooling. All stages have both public and private school options so you may decide to choose a mixture of both public and private education for their child.

When you decide to send your child to a private school, the next question is in what year of their education you’d like them to start in.

You can start your child at a private school in kindergarten but many parents have decided to send their children to private schools at later stage in their schooling, for example in Year 7. The main reason is the cost. Many parents believe that as long as their child is educated towards the end of their schooling years, tertiary education may not be as hard.

Based on my own experience, this is not necessarily the best move. In discussion with other parents we have noticed the increased confidence in our children, their increased learning capacity, and their ability to effectively communicate (they start presenting in front of their class from first term). These early years are so very important, and it will truly benefit them for the rest of their lives. The most important skill they are leaning is the skill of ‘how to learn’. This, I believe, is as important as the content in the curriculum.

Another thing to take into consideration is your child’s maturity, or sensitivity levels. For some a move from a public to a private school at age 13 can be disastrous where at age 6 there may have been less opposition. Likewise they may not thank you for trying to move them in their last years of schooling. At this time, established peer friendships also have to be considered.

If you choose to enter your child into private education at a later level, will he/she be able to fit in easily. Will his current education standard meet that of the selected private school? Often both academically and socially the standard can vary—how greatly depends on both the schools involved and the child themselves. Factor in time to help them through this transitional phase.