Education savings & inflation

Two of Momentum’s Senior Investment Consultants, Eric Windell and Thamsanqa Khumalo, answered some of our questions about inflation and how it affects your budget for your child’s education.

What is inflation in laymen’s terms?
It is the increase in the general level of prices for goods and services

What causes inflation?
Inflation is caused by factors such as full employment or demand/cost of production goods or raw materials, increase in wages (pushed mostly by unions), high or increases in import tariffs, a push for high profits by firms etc.

What is the current rate of consumer price inflation?
According to recent media release, CPI slowed down to 6.3%

What’s the outlook for the future?
The Reserve Bank has a long term goal of reducing inflation and their medium term objective is to maintain inflation within the range of 3%- 6% per annum

What are the consequences of inflation?
Inflation has an impact on economic growth of a country and has even a huge impact on the poor, as the prices of goods and services increase it is highly unlikely that the poor will get a likewise increase on their wages and salaries to keep up with the changes and if a wage/salary increase is effected, it is in most cases way below inflation. The value of money is also affected in a way that the value of money one has in hand right now will not be worth the same value in the future as a result of inflation and this affects mostly education savings.

Is pocket money affected by inflation?
Inflation affects money from all levels including pocket money. Be sure to save your pocket money in an account with a good interest rate.

How is my child’s education policy affected by inflation? How do I know it will be enough when they want to study in a few years’ time?
Education is a service offered, this requires certain resources in order to be fulfilled such as building, rent, labour, security, stationery and other useful materials one can think of, to acquire these money is needed and as the cost/demand of all these resources increase the burden is transferred to parents and it means as a parent my child’s education is also affected and a review must be considered. It is very hard to tell if your child’s education investment will be enough, the idea will be to have a premium increase slightly above inflation to ensure the investment has value for money in few years’ time.

Is an education policy only for university/college or can it also help me pay for school fees?
An education policy could cover any level of education at any time.

How does inflation affect associated costs to education (such as uniforms, stationery, text books etc.)?
A good example of inflation caused by demand will be the January rush where parents run around looking for best prices all over South Africa for education material. During these times stores push their prices up as the demand is also high and in most cases the money saved to that date has no value for money and education cost becomes expensive and as a result parents have to make certain sacrifices through opportunity cost.

Tips on how to beat inflation

  • Spend less on unnecessary items
  • Focus on necessities and create a culture of saving
  • Monitor economic changes and as these changes take effect, review your investment and make the necessary changes

You might want to read more about how to apply for a study loan.