Step 1 of our game plan to pay for private school fees is to determine the best asset class to invest in based on your circumstances and goals. This is step one in the two-step game plan that will help you bring the overall strategy together when we work through the next chapter.
You could well ask ‘just tell me straight off, what asset class and how do I use this asset to get to my end goal?’ But before making any investment decisions, it is always prudent to ask yourself: What am I investing in? What is the asset, and what returns can I reasonably expect? Therefore it is important to ensure you understand a bit more about what we are investing ‘in’.
First, let’s look how the asset class of cash performs.
Cash
Of all the asset classes this is the worst performing in terms of investment growth. There is virtually no growth with cash investments. Savings accounts offer minimal or no interest and any interest they do offer is outweighed by account fees. As we all know, cash is easily accessible, accepted everywhere and useful for purchasing goods, paying for services and to survive day-to-day.
However, as a saving vehicle, cash does not generate enough growth to provide future income for goals such as funding private school fees. In the Australian banking system, there is an excess of cash just sitting in the banks and cash management trust, most of them earning very little interest. If you leave your savings in cash, you better watch out for inflation.
For example, if you left $10,000 in cash in a bank account in 1995, inflation over the period 1995 to 2006 would itself wilhavel eroded your purchasing power to $7,831 within 10 years. (That’s a loss of 21.7%. So, unless you earn more than inflation, your wealth is essentially going backwards. You need to invest your cash that is not earmarked for short-term goals into other asset classes.
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