Yahoo Finance $54 million question: Private school vs index fund?
Something I’ve been pondering lately is the value of a private education, and how that might compare to a long-term monetary investment.
Like most Australians, I was lucky enough to get a free education at primary and secondary school. I also managed to get in a couple of years of tertiary education, which cost about $5,000 a year until, like all good internet entrepreneurs, I dropped out.
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There are some Aussie kids, though, whose parents can afford to buy them a private education.
Research suggests parents choose to send their kids to a private school because they believe it will deliver better educational outcomes.
A 2018 study on academic, social, psychological and attainment outcomes by Robert Pianta, dean of the School of Education and Human Development at the University of Virginia also suggests the higher test scores seen in private school kids is mostly the result of their family backgrounds, such as having parents who are university-educated and/or have higher incomes.
“Private schools tend to score better on tests," said Christopher Lubienski, co-author of the The Public School Advantage: Why Public Schools Outperform Private Schools.
"But we found that family background differences more than explains the difference between public and private school test scores.”
The potential benefits of a better education are many, including personal fulfillment, higher chances of securing a preferred university place, and future income-earning potential.
However, if your only priority is to help your child’s financial future, perhaps there is a different strategy you could consider.
Private school fees in Australia range from $10,000 to $41,000 per year.
A median cost of approximately $25,000 per year, over 13 years of schooling, works out to a total cost of around $325,000. That’s a lot of money, but parents see it as an investment in their child’s future.
What's the opportunity cost to send your child to private school?
One way to calculate the real cost of a private school education is to consider what else a parent could be doing with that money.
As a relatively new investor, I've been thinking a lot about the opportunity cost of money and compound growth, and it’s an interesting exercise to work out the opportunity cost of the money being used for a private school education.
What would happen if, instead of sending a child to private school, you invested the same amount of money for 13 years and let it compound until the child hit retirement age?
I asked Tony Kynaston, host of the QAV Investing podcast and a professional value investor who has averaged a 19.5 per cent return on his portfolio over the past 20 years, to help me work out the maths.
Let’s say parents opted to send their child to a public school, and put the equivalent of private school fees in an Australian index fund that returns an average of 10 per cent per year. Then they stopped adding to the fund after the 13 years, but let it run until the child turned 60. The child would have around $54 million. Not a bad retirement.
Kynaston said that retirement nest egg could potentially be a lot more, depending on the diligence of that child's investment strategy.
Private schools can provide wonderful benefits. Kynaston sent his daughter to private schools, but he said she would have been a lot better off if he’d invested the school fees.
Most people struggle to comprehend the power of compounding returns and, as a young adult, it’s definitely something I'm starting to put my attention towards.
Of course, many of us also don’t feel confident that we know how to invest properly.
That’s the genius of index funds. They require low effort but provide excellent long-term returns.
At the very least, this is a fun thought experiment but it may well be worth considering what is really in the best long-term interests of our children.
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