Stealthy Wealth - Moneyweb
It depends on where that money will be coming from (and a few other things).
There’s the cold, hard cash aspect as well as a few softer issues to consider.
Next year we will find ourselves at a parenting milestone, which is both terrifying and really exciting! Stealthy Junior will officially be starting school.
It also means we win ourselves the grand prize of around 14 years’ worth of school fees to pay, starting January 2020.
Fun times for Junior, not so fun for our budget.
School fees are going to make up a significant portion of our annual spend next year (and the same is likely true of most parents). So naturally spending some time trying to minimise the damages could be a worthwhile pursuit. We all would love to figure out how to save money on school fees, right?
One option that a lot of schools offer is a discount if you pay the entire year’s worth of school fees upfront. Something like, if the annual school fees are Rx, you can either pay Rx/12 per month, or, if you pony up the full amount in January, you will pay Rx less y% discount.
A few readers have asked me if this upfront discount option is worthwhile, and since I am now facing the same question myself, I decided it was time I took a closer look.
Going into debt to get the discount
The first very important thing to realise is that you should only consider the upfront discount if you have the cash available.
If you are going to need to go into debt to come up with the upfront amount, then it is almost certainly not going to be worth it.
For example, paying 12% (and realistically probably a lot more) interest to score a 10% discount is going to leave you worse off than just paying the monthly amount.
Or, even worse, using a credit card and paying in excess of 20% interest to score a discount of what is unlikely to be more than 8-10% doesn’t make any sense.
Running the numbers
Okay, so for those fortunate enough to have the cash available – should you take the upfront discount, or leave your money in your savings account/money market/home loan access facility and earn yourself some interest while you pay monthly?
I put together a spreadsheet to help you answer this question according to your own unique situation. To use the spreadsheet, all you need are these three inputs:
1. The total annual cost of the school fees.
2. The upfront discount being offered
3. The interest rate of your savings account where the school fee money is currently living.
For example, consider a school with annual fees of R36 000. They offer a discount of 10% for upfront payment, and someone has this amount available in a Money Market account that returns 6% per annum. Should they take advantage of the discount?
Let’s enter the inputs into the three grey blocks of the spreadsheet:
The Excel elves then run off to crunch some numbers so we can compare the two options:
The discounted lump sum is taken out of the savings, and the remainder is left in the account to earn interest.Each month, an amount is taken out of the savings to cover the usual monthly fee while the rest of the money remains in the account to earn interest.
The option with the bigger balance at the end of December is naturally the one to choose.
Here’s how the numbers look for this example:
You can see that by taking the upfront discount, the remaining R3 600 left in the account grows to R3 822 by the end of the year. This compares to a monthly withdrawal of R3 000 a month while the balance continues earning interest, leaving a final balance of R1 028.
And the end result is …
I played around with the spreadsheet, and found that in most cases, as long as the upfront discount is decent (say 5% or more), then it is worth going with the discounted upfront payment option.
There are some corner cases where it will swing the other way though.
For example, consider the same school with fees of R36 000 per year, but now they only offer a 4% discount. And let’s assume that someone had the funds saved in their home loan’s access facility scoring them an interest rate of 10%.
In this scenario it is ever so slightly better to pay monthly:
Some softer issues
Right, so that takes care of the numbers aspect of the decision. But as with most things personal finance, there are some softer issues to consider as well.
I will touch on a few of them:
Some people prefer to take the monthly option, regardless of what the numbers say. They are scared that once the fees have been paid, they will not have the discipline to save the equivalent monthly school fee amount – or ‘put it back’ into the account it came from – and may end up spending it.
Paying monthly sort of forces them to be responsible, and to maintain the habit of that monthly expense.
But it is possible to hack this – if you can score by paying upfront, but are afraid that your discipline might let you down, then consider paying the discounted upfront amount, and then setting up a debit order or recurring payment that will automate the saving and remove the temptation to spend the money.Since schools are pretty valuable institutions, you may want to give them all the help you can get while you entrust them with the care of your most precious cargo. Some people get a good feeling that by giving their child’s school their money upfront, they are helping the school out to some degree by providing them with a nice cash flow boost.Some people also prefer the upfront cash payment because it removes some of the stress, worry and admin of having a monthly payment. That is also worth something.
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