education

 

In the USA, education funding is a big part of financial planning, because a college education in particular is just so expensive.

But in Australia, the costs of education are catching up. According to the Australian Bureau of Statistics, education costs increased by 5.4% in the year to June 2015 – that’s at the same time as the broader inflation was only 1.5%.

I’ve delivered seminars to client and accounting groups in the past on various strategies that parents can use to save and pay for their children’s education – but there is one particular feature that I really love about education investment bonds.

You see one of the biggest challenges that we face in making good choices about our money is we have a lot of behavioural biases that just don’t help us out. But the best part of an education investment bond is that it works with one of those biases to get a good outcome.

Mental accounting is a behavioural bias best exhibited by Dustin Hoffman, in his early days as an actor – when cash was a little bit tight, as told by his good mate Gene Hackman.

Dustin asked Gene if he could borrow a small amount of money for food, and Gene is more than happy to oblige. But when he walks into Dustin’s apartment, Gene can see five mason jars on the shelf labelled Rent, Entertainment, Books, Food and Bills.

There’s money in four of the jars, just not food! Gene of course asked Dustin, hey why don’t you just take some money out of the Entertainment or Book jars – but Dustin very seriously told him that’s just not possible.

You see even though a dollar is a dollar, we compartmentalize our money quite a bit. That’s why a windfall such as a bonus or lottery win is much more likely to be spent on a holiday.

One of the best things you can do in your financial plan, is find ways to work with rather than against those behavioural biases – which is why I love education investment bonds. Because the investment shares a label with its purpose there’s a much better chance that we’ll stick to the plan and remember why it was started in the first place, so it’s there when required for education expenses.

A couple of other benefits that we’ve found make these popular:

  • The investment is taxed internally, so you don’t need to figure out how to include it in your tax return every year
  • The tax on earnings is 30%, which is lower than your marginal rate if you have more than $37,000 a year in other earnings and the tax can be 0% if the earnings are structured correctly for eligible education expenses
  • They can be a great focal point for other family members who want to provide gifts but not just more toys, they can also add more to the education investment bond on a child’s behalf

If you’d like to explore in more detail if this is a good solution for you, the first step is to book an obligation-free appointment. You can do so by giving us a call on (02) 6247 1233 or emailing canberra@mlcadvicecentre.com.au.