Private education: It's not a $16,000 decision, it's more like a $500,000 decision.

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My wife and I are friends with a terrific couple. Let's call them Dr and Dr X. They have a 4-year-old daughter and an infant son. 

They live in a good suburb, on the same street as one Christchurch's better known public primary schools. They're also close to one of Christchurch's most exclusive private schools.

They've heard that the primary school isn't as good as it once was, and it seems likely they'll send their daughter to the private school, at the cost of $16,000 a year.

Ultimately, they can afford it. (Remember: Dr and Dr X.) I'm not criticising the decision: if it's in line with their priorities and values then I fully support their decision to do so.

But as with any major financial decision, it's important to do so with eyes wide open. It's easy to think of this as a $16,000 decision. But it's not a $16,000 decision.

Let's take it as a given that they were going to send their daughter to private school for intermediate and secondary school, so we're talking about a period of 6 years of school fees. Multiply $16,000 by 6 and you get  $96,000. They have two children, so they'll probably do the same with their son, meaning this is actually a $192,000 decision.

There are additional costs associated with going to a private school, but to keep things simple I won't factor them into my calculations here. I'm also ignoring inflation, but it's common for private education to increase in price at higher than the rate of inflation, so the figure is likely to be higher than the numbers here.

When making a decision of this nature, it's valuable to compare it to other things you could do with the money. Instead of, say, giving each of your children the benefit of a private primary school education, you could invest $16,000 per year for the next six years and give them access to the funds when they turn 30. Generate an inflation-adjusted after-tax return of 3% per year, and you'll be giving them nearly $190,000 at age 30. Generate a 5% return and it's close to $290,000. (These figures are in today's dollars.)

Let's multiply this by two children, and we could be in the vicinity of $400,000 to $600,000. Let's cut the difference and say $500,000. In a sense, the "$16,000 decision" to send one child to a private primary school is actually a $500,000 decision. 

(Again, I'm assuming private secondary education. The figures are even larger if we question this assumption.)

It's possible that this is small change compared to the benefit both children might receive from being in a superior academic environment for the first six years of their education. After all, you only get one chance at raising your children and most parents want to give them the best opportunities you can. And there are other benefits to sending your children to a private school, including social cachet and access to valuable networks (for you and your children). 

But there's a fair amount of uncertainty here, including assumptions about the respective education that each of these schools will provide to your children, and a gamble that these differences will endure over the six years and genuinely have an impact on their children's long-term life outcomes.

This is a personal decision, and as I've written about before in relation to the decision my wife and I have made to "over-capitalise" in our home, a decision that one couple can legitimately make might be different from the decision another couple makes.

It's quite possible that in 25 years' time, $500,000 may be a drop in the bucket for Dr and Dr X. At which point, this could be a moot point for Dr and Dr X.

But I use their example to illustrate that every decision we make needs to reflect your values and priorities, and when it comes to the big decisions you need to think them through because the consequences are often much larger than you think. 

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.