The pros and cons of savings plans

Years ago an Australian Scholarships Group (ASG) fund was established for the kids. It seemed reasonably convincing at the time; that you’d put in a bunch of money each month and it would accrue interest and pay out when they went to uni, to pay for their expenses.

But after some years in it, I’m no longer totally convinced of its benefits, and I’ve stopped it and withdrawn the money. There are some issues with it, at least in my view:

  • The return isn’t very good. You could put the money into a high interest account and get a better return. Which is what I’ve decided to do.
  • It makes assumptions about what the kids will do, and what they’ll need for their education. While I could reasonable assume that my kids will work their way through high school, and then into university, some kids don’t. They might need specific education expenses sooner than uni. (School costs a fair whack too. As it happens the plan is my kids will be in a couple of good quality government schools, but even they don’t come cheap.)
  • It (partially) locks up the money until they’re starting tertiary education, when me, the poor suffering paying parent, might be able to use it more effectively right now.

Certainly ASG has benefits. The primary one seems to be that it’s a pledge to put away a bit of money each month for future use in your kids’ education. It gets paid by “set and forget” direct-debit every month, which makes it easy to pile the money up. And it seems to work very well for a lot of people… but not me, I’ve decided.

This is not the only area of my finances I’ve been considering. With private health insurance premiums jumping yet again, I’m pondering (a) cutting my insurance back to the minimum to not incur the government tax surcharge (which is the only reason I joined) and/or (b) self-insuring (though it appears not many people do this in Australia for personal health insurance, so I don’t know how successful it would be.)

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9 Replies to “The pros and cons of savings plans”

  1. I have heard that dental services are very expensive in Australia. Is this right? And that only private insurance covers dental… true? So lucky my wife is Dental Dr. so I don’t have to worry about that… :)

  2. Daniel
    I think you said you have a mortgage?
    In that case, maybe direct debit what you paid into ASG each month into your home loan account. Pay off that debt faster. Just a thought!
    Rog.

  3. I’m not sure that self-insurance would actually work, in practice. Even if you had saved money for that purpose, when faced with a choice of free public hospital treatment or spending actual cash on private treatment, I expect a lot of people would go public and spend the money on a plasma TV.

    Plus, there are two benefits to insurance: One is that it shifts costs around in time (ie. you can make a huge claim today and then “pay it off” over the rest of your life as a member). The ABC link recognises this. But the other benefit of insurance is that is spreads the risk over a large number of people, like social security. So you may be perfectly healthy now, but if you suddenly become chronically ill there’s a chance you’ll actually “profit” from your insurance, claiming more than you ever pay in premiums (assumed your fund covers you). If you are that kind of person, then insurance will always be a better deal than self-insurance.

    Oh, and without paid insurance you’ll get hit by the 1% surcharge. Ouch.

  4. I agree with Roger.

    Paying down a home mortgage is (i) very safe, (ii) high returning and (iii) very tax effective.

    This gives a guaranteed 7% on your money AFTER TAX, which makes it just as good as anything else yielding about 10% before tax.

    If the high interest account gets anything less than 10% (which it will if run by a reputable institution) I’d question leaving anything more than emergency expenses there and put the rest in the mortgage.

    These days with flexible loan products, redraws, lines of credit, etc it’s not as if your equity is locked in your home forever if you really do need it (eg education, health or other investments) later.

    Though it helps some people’s self-discipline (in saving for a specific goal), I’m not a fan of hypothecating amounts for particular expenses (eg health), and prefer a portfolio which should eventually cover everything since it provides maximum flexibility.

  5. I agree with Roger and Peter, and suggest that the 1% surcharge makes “avoidance insurance” mandatory; you can get “cover” for less than $500. I think iselect.com.au is where we found ours. We’ve spent heaps on medical costs, yet to make a claim. Thanks Mr Howard!

    I was thinking of starting my own fund which offers even less “cover” than the minimum insurance offered, but to make a claim you’d have to call an astonishingly expensive 1900-number, where you’d be kept on the line for a time proportional to the amount you wished to claim – as a function of how much more complicated expensive claims are, of course. But, surprisingly, for $200/year you’d avoid the 1% surcharge. Who wants to sign up?

  6. Not me, Josh, though your idea has merit, it sounds too much like hard work to me.

    If I was developing a dodge, I’d just target people earning $50 – 60k (assuming the cut off is $50k) with a range of income minimising strategies.

    Whether it’s donating huge amounts to dodgy religions (Jedi?), purchasing shares in banana plantations or buying investment apartments (Docklands, Auckland and Gold Coast still available) I can guarantee a package that will give you a marginal rate of 17% and a taxable income of under $20k. $20k is a nice figure as you get the low income earner rebate to make you feel like a prole.

    One’s gross income could be $60k, but with a bit of magic, taxable income is just $20k, so you pay just $2k tax and no health insurance rebate. You save about $15k tax and I make about the same. Sounds fair to me!

  7. In Washington State, we have two options for educational savings accounts. The first is a 529, which is a federal thing. The second is GET, which is a state thing, and stands for Guaranteed Education Tuition.

    While you put what you want into a 529 account, GET is very specific about how much you must save and is based on the age of the child when you start. Basically, if you make the payments in the amount directed, they guarantee that this will cover 4 years at any state-run university in Washington. If your child decides to go elsewhere, it has a cash value based on an interest rate that is lower than a mutual fund, but higher than a certificate of deposit.

    Don’t know about ASG, but GET is not a bad deal considering that tuitions are rising faster than inflation, or even the stock market in some cases.

  8. Josh: ooh, send me a form! (I couldn’t find anything that cheap in iSelect, at least not for a single parent + two kids.)

    Peter/Roger: yeah, the mortgage is getting some attention.

    Roby: Dentists aren’t cheap, but not beyond reach for most people, at least for basic 6-monthly checks.

    Thankfully Greg, university fees aren’t as high in Australia as in the US.

  9. about 6 yrs ago we pondered giving up private insurance. IN the end i talked hubby into keeping the extras so that if our chn needed dental, eye wear etc we had the cover. at the time it seemed a great plan. our insurer was willing to give us 12 months grace but at the time things were really tight and it was going to be 15 months until things weren’t again so we dropped everything but extras. 15 months later we inquired about returning. there was no consideration given to the fact that we had been prior paying members of the fund for nearly 20 years. We were expected to pay the same as someone who had never been a member of the fund. Complete with the new extra penalties because of our age as if we’d never had any cover. needless to say we didn’t rejoin. a shame they didn’t allow some reduction in costs for potential returnees. soon after i discovered i had an ongoing medical problem that required surgery. something that had been undiagnosed for more than 10 years. i’ve had one minor and one almost minor surgery related to it since. both on public health. and am curently waiting on major surgery. its been 448 plus days now.. and 2 delays so far.

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