It’s nearly the end of January and parents with school-going kids have to decide how to pay the year’s school fees. The school year is generally 10 months long. Many schools give parents the option to pay the full amount upfront with a discount, or pay monthly instalments.
Which is the best way? Let’s have a look…
How much is the discount?
This is important. Find out before you make any decisions. If your school doesn’t offer a discount, it’s a no-brainer to opt for the monthly instalment option because you can keep your money in your own bank account or in your access bond account, which earns or saves you interest over the course of the year.
But what if the discount is 5%, commonly offered by many schools? Say school fees for one child are R40,000 for the year — a 5% discount equals a saving of R2,000. In other words, you could choose to pay R38,000 upfront, or R4,000 each month over 10 months.
The only way to beat the upfront saving and still pay monthly is if you deposit the full amount in a savings account that earns more than the discount in interest over the period. Most banks currently offer 2.55–3.20% per annum* on instant-access savings accounts. (We’re not including any accounts that restrict access to the money, because you need to withdraw each month.) If you park R40,000 in a savings account that earns 3.20%, and you draw R4,000 for 10 months, you’ll end up with R459 in interest after you’ve made the final withdrawal.
This is a far cry from the R2,000 discount you’d have received at the beginning of the year. In fact, to match or beat the discount using a savings account, that account would have to earn a whopping 15% interest per annum, which is pretty much impossible in the current economic climate.
So, what’s the answer?
If you have the funds available and there’s a decent discount on offer, it makes sense to pay upfront. Use the money you save for other school-related expenses, like uniforms and stationery.
Our scenario only considers one child. Discounts will add up if you have two or more kids, but so will the upfront payment! Some schools offer sibling discounts — do your research and find out what’s on offer.
As always, the best way is to plan ahead. If you can’t manage the upfront payment this year, start thinking about next year. Use 22seven to create a monthly budget that includes putting money aside for next year’s school fees. That way, when January 2023 rolls around, you’ll have the full amount ready and waiting — giving you the benefit of the discount, the interest earned along the way, and the peace of mind knowing that school fees are taken care of.
That’s worth saving for!
*Interest rates reflected as Nominal Annual Compound Monthly (NACM)