I have found over the years there are certain topics which can be quite polarising in people's beliefs. Over late night dinner conversations, people often heavily debate (with sometimes very strong opinions too) topics like politics, religion, the environment, and now private schools versus public schools. It seems everybody has an opinion on this topic!
For some, sending their kids to a private school is important and the biggest hurdle with this decision making idea is how to fund the opportunity. Unlike other parts of the economy which might be running at a 3% inflation rate, the education sector inflation rate has been a lot higher and historically this has been as high as 5% p.a.
Unfortunately this high inflation rate also means that the cost of education has increased at a far rapid pace than one might be expecting. These days it is not uncommon for a private school to charge around $27,000 per year or more for each child which might be enrolled from year 7 onwards.
The reality is that it is likely that if there are 2 or more children at school at some point you may be funding around $54,000 per year in school costs after tax.
If we assume a marginal tax rate of 37% this will mean that a person needs to generate around $85,714 in pre-tax dollars to pay this education cost assuming 2 kids are in private school. This is also assuming that they are walking into the school gates next year! In reality it may be that this might still be 7 plus years away or shorter so if this is the case then the school fees will be higher again.
Now like most things in life, this only gets them in the gate and there is all the extra's on top like a uniform, books etc etc. so it does start to give you some idea of what might be involved.
The biggest question we get asked when it comes to this particular area in life is "How do you fund such a huge cost each year- particularly if both parents are working?".
The most simple answer is to start as early as possible a robust investment plan. The reality is that a well rounded investment plan can smooth out this huge cash flow drain if it is commenced early and, in some cases, sufficient capital can be put aside to meet this cost without any adverse impact on lifestyle.
So next time you are driving along and notice the kids in the school uniforms walking around catching public transport on their way to and from school, keep in mind that if you are thinking about sending your kids to private school it is better to act sooner rather than later to get a firm strategy established.
As always with any great idea, it is important to speak with a suitably qualified financial planner and we would of course recommended that you speak with AJ Financial Planning. For more information, please visit ajfp.com.au or call 03 9077 0277.