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'Four years before my daughter was born, I started a fund. It paid for her private schooling.'

Four years before my daughter was born, I started an education fund for her. When she was born, the fund had enough money in it to pay for her independent high school education. Here’s how I did it.

Starting the education fund:

There are many ways to start preparing financially for your child’s education. I might need to write another post which looks at each of them. The focus of this post, however, is to explain how I started and grew my daughter’s education fund. Later in this post, I provide more details about the fund I chose and why. That aside, the fund I chose required me to submit a few documents online to get it started. I also needed to make an initial once-off minimum investment of $5000.

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Regular investment:

I started a recurring automatic direct transfer into the fund from my bank account once it was set up.

At that time, my job paid me fortnightly. I made a direct transfer of $200 from my bank account into my daughter’s education fund the day after I was paid.

There were a few key reasons why I made the transfer recurring and automatic. My first reason was that I didn’t think I would have the discipline, commitment or care to transfer the money manually every two weeks. My second reason was that scheduling the transfer for the day after I got paid made sure there was enough money in my account for the transfer to happen.

Dollar-cost averaging:

The last reason was a simple but powerful strategy I had read about called dollar-cost averaging. Dollar-cost averaging requires me to consistently invest the same amount of money into the same investment e.g. an index fund. Index funds are made up of units of equal value. This means when I invest in my daughter’s education fund I buy units of that fund. Investing the same amount consistently means that when the value of the units goes up I buy less and when the value goes down I buy more.

For example, regular investment of $100 into an index fund that has $1 units gets me 100 units. If the value of the units goes up to $1.20 my $100 investment gets me 83 units. If the value goes down to $0.80 the same investment buys me 125 units.

This means that over time, my consistent investment bought more units at the lowest price and fewer units at the highest price. I don’t have to try and predict when the fund’s units will go up or down in value because my consistent investment effectively smoothes out the ups and downs of the price. It ensures that as long as the trend of the value of the units is up, my total investment goes up in value.

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Fortunately for me, the fund’s units have increased in value by 19 per cent since I first invested in them.

Having a goal:

There is no way I would have started or continued investing money into an education fund without a really important goal – to be able to offer my daughter high school education at an independent school.

It might seem crazy that I started investing money into an education fund for a child I didn’t have. But, that’s how important this goal is to me.

I didn’t go to a private school but I grew up in an area where everyone else did. I’ve been motivated by this over my life and it’s pushed me to create and achieve a lot of goals including financial ones.

Once my wife, girlfriend at the time, and I discussed that we both wanted to have a child in the future, I started setting goals I wanted to achieve for my future daughter or son. One of those goals was having the financial ability to pay for my future child’s private education.

I researched everything from how much it would cost (A LOT) to how much I would need to start investing to be able to afford it. This is how I discovered index funds, dollar-cost averaging, and most of what I now know about long term investment strategy.

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"It might seem crazy that I started investing money into an education fund for a child I didn’t have. But, that’s how important this goal is to me." Image: Mamamia.

Index funds:

I picked Vanguard’s LifeStrategy Growth Index Fund for my daughter’s education fund. I chose it because:

- Low management costs (less than one per cent)
- No transaction cost to buy more units in the fund
- Diversification of investment across various asset types e.g. shares, commercial property and bonds
- Returns of an impressive average of nine per cent per year over the past 10 years.

Investment fees:

It’s worth noting that there can be fees that come with investing. Fortunately, my index fund has no fees.

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Establishment fee: $0
Application/contribution fee: $0
Withdrawal fee: $0
Termination fee: $0
Switching fee: $0
When I buy units in my index fund, I do it through BPAY which is a free transaction. The minimum investment amount on a BPAY transaction into my index fund is $100.

By comparison, when you buy shares, you are charged a transaction fee called brokerage. Brokerage ranges from $20 for a $100 transaction to $100 for a $100,000 transaction.

I’ve made close to 200 transactions into my index fund. If I was investing directly in shares, the brokerage costs alone would have been almost $4,000.

Increasing regular investments:

At the time I started investing, I was in my mid 20’s and a few years into my professional life. My salary was around $70,000 annually (pretax) and along with the minimum initial $5K investment, I started investing $200 into the fund every fortnight. This worked out to be about 10 per cent of my after-tax income.

I started with 10 per cent of my income because of a book I read called The Richest Man in Babylon by George Clason. The book has lots of lessons and suggestions, one of which is to save and invest a minimum of 10 per cent of your income.

Over the years that followed, my career grew along with my income. As a result, I was able to increase my regular investment into the fund. I was also able to increase the percentage of my income going into the fund. As my income increased, I had more money to invest. I made this possible by keeping my living expenses at around the same level as they were when I was on a lower income. At the time of writing, I’m investing 30 per cent of my income into the fund.

Buying the dip:

Once I started paying attention, I found opportunities to buy more units in the index fund outside my regular investment. When the value of the units dropped, I invested a little extra to buy some extra units. This was basically the same as buying units on sale.

I invest in an index fund which is diversified. This means it invests in a lot of different assets. The Australian stock market makes up a third of the fund. Microsoft, Apple and Amazon and the world’s other largest companies make up another third. For this reason, the price of the units in the index fund rise and fall.

Pay attention:

After I made my initial investment into the fund, I added the companies to the stock tracking app on my phone. I also started generally paying a little more attention to the finance news. If I saw that the Australian stock market was dropping, I would invest a little extra in the fund. Sure enough, the price of the units at that time were a little lower so I’d just bought on sale.

No one knows how far a stock will rise or fall. The same goes for an index funds unit price. Sometimes the price I bought the units at would drop lower than the ‘sale price’ I bought them at. If this happened, I’d be fine with it. Because I knew my regular fortnightly investment meant I would inevitably buy at the highest and lowest prices. Because the long term trend of the fund’s unit value has been up, my regular investment means I ride that trend.

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Jared grew his index fund from an initial $5000 deposit, through fortnightly payments and clever investments. Image: Getty.

Compound Interest:

The other key factor in my investments rapid growth is compound interest. Compound interest is where you reinvest the interest from your investment back into your investment.

Albert Einstein famously called compound interest “the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”

Warren Buffett said, “my wealth has come from a combination of living in America, some lucky genes, and compound interest.” He’s arguably the world’s greatest investor so worth listening to.

In my case, compound interest means automatically reinvesting the dividends into buying more units in the fund. Vanguard lets you select this option so it happens automatically without me needing to do anything.

On average, the fund has paid out an annual dividend of 7.5 per cent since I started investing in it. The percentage has grown over the years though. In my first year, the dividend was 3.7 per cent. Last year, it was 11.5 per cent. This has meant that the amount I reinvest into the fund each year has also been growing.

Currently, the median total cost of high school fees at one of Melbourne’s independent schools is $60,000. The average cost of fees at Melbourne’s most expensive private high schools will be approximately $281,000 when my daughter starts.

Fortunately, my daughter’s education fund will comfortably be able to pay for any private high school of our choice. This will only be possible if I continue with my current fortnightly investment.

Just as well because my wife and I are hoping to have a second child.

This post originally appeared on the blog, Money and My Daughter. It has been republished with full permission.

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