Finding the money is the first test in your children's education

Educating your children can cost a packet, whether it's a state or private school, says Rob Griffin

It's never too early to start saving for your child's education

This week's successful GCSE students may be moving on, but in many parts of the country, the new academic year starts as early as this Thursday.

Sending a child off to school for the first time is an emotional time for any parent, but it can also be financially stressful if they haven't planned how they are going to afford the bills.

Paying out for uniforms, books, a seemingly endless supply of stationery, the latest sports equipment and regular field trips can take a heavy toll even on those parents who have relatively deep pockets.

For the parents of 615,000 children in independent rather than state education - a number that accounts for about 7 per cent of all school-age pupils - the burden is even greater.

According to figures compiled by the Independent Schools Council, the annual cost of sending a secondary school-age child down the private route will be a minimum of £7,500 a year. If they are boarding then this figure will soar to more than £21,000. Further hikes are likely over the next few years.

Anna Bowes, a savings and investments manager at the independent financial adviser (IFA) Chase de Vere, says this means that parents will need to have saved a staggering £121,000 by the time their child is 11 years old to cover the costs of educating them until they leave the sixth form.

"People will have to put away in the region of £656 every month from the time their child is born - and that's assuming their investment grows at 6 per cent every year," Bowes warns. "It's quite a hefty amount to find."

The first stage is to be honest about your current finances, career prospects and ambitions. You need to recognise that sending your child to an independent school will be a major commitment.

Financial planner Malcolm Lyons of Music Media IFA and his wife Emma are already considering what the best option is for their two-year-old son Joshua. The couple are using a combination of Isas and other investment funds to keep all their options open.

"I can't say whether or not he's definitely going to be sent to an independent school. We will have to make a judgment based on his progress and our financial situation," Lyons explains.

Discuss your reasons for wanting to send your child to an independent school and whether there are any state alternatives that match your criteria. What's important to you? Is it past exam results? Or are you more interested in after-school activities?

For example, a better option might be to move into the catchment area of a well-regarded school, although you will have to weigh this up against likely higher prices for properties in sought-after locations, as well as moving costs.

You also need to work out exactly how much disposable income you have each month and pinpoint the areas of your life - such as the second car and meals out - where you could make savings to free up some cash if required.

It's also worth seeing if there's any prospect of financial assistance from relatives. A child's grandparents, for example, may be willing to contribute to the cost of their education - even if it's in the form of a loan for the early years.

Finally, explore the possibility of grants. In 2004, independent schools paid out about £300m in bursaries and scholarships. This could be a good route for you to take, particularly if your child excels in areas such as music or sport. The best way of finding out what is available is by talking to the schools themselves.

Mark Dampier, head of research at IFA Hargreaves Lansdown, says the earlier you begin investing for your child's future, the greater your chances of having enough money when the first day of term comes around.

"The ideal scenario is to start putting money away before you even plan to have children - although this is often impossible," he admits. "It doesn't mean it's got to be used for education, but at least having spare money will give you options."

If you are convinced that independent schools are definitely your preferred option, you will need to decide how to raise the cash. How much you need to save - and where you put your money - will depend on the return you need, says Patrick Connolly, research and investment manager at John Scott & Partners.

"If you only need 5 per cent a year to hit your target, you can afford to be more conservative with your investments," he explains. "However, if you need up to 10 per cent then you'll have to take more of a risk."

We asked leading independent financial advisers to draw up a list of the most popular ways of saving.

Individual savings accounts

If you have any money to invest then you should be using up your tax-free ISA allowance. Anyone over the age of 18 can invest £7,000 each tax year - and up to £3,000 of that can be in cash. For a couple, that means a total of £14,000 can be saved each year. Before considering any other schemes, make sure you have used your allowance.

National Savings

Backed by the Government, these products are among the safest around and there are plenty of options - including the Children's Bonus Bond - open to investors.

On the downside, the returns have been pretty lacklustre in recent years. One good option, however, is Premium Bonds, which are tax-free investments that offer the prospect of a £1m jackpot.

If lady luck shines on you, all your worries about paying the school fees will disappear at once.

Savings accounts

It's always worth having a savings account paying a decent amount of interest, but this is unlikely to be enough to generate the amounts you need. At present, with the low base rates, the best annual return you can hope for is around 4-5 per cent.

Unit trusts, Oeics and investment trusts

These are pooled funds where individuals buy a share of a pool of investments in asset classes such as equities and bonds within a remit set down by the investment house. It's a popular way of making money and this is a realistic possibility if you have a decent fund manager looking after your money.

Investments can go down as well as up, however, so make sure that you choose yours carefully. Ensure that you have at least some of your money in safer assets.

Property

Britain's housing market has rocketed in recent years with the net result that thousands of people are sitting on equity in their homes.

Consider whether it would make sense for you to release this cash to pay the school fees. If you have plenty of years before your youngsters are heading off to school - and feel confident that the property market will grow substantially over this period - you could even consider a buy-to-let property. As well as providing a short-term income, you would also be able to sell it nearer the time to generate cash.

Whichever option you choose, however, it is advisable to seek proper financial advice to select the route most suitable for your purposes. In particular, you may need guidance on how to change your investment strategy as time passes - to move into lower-risk assets as you get nearer to needing the money, say.

Most people choose to fund the school fees using a mixture of different investment vehicles, says Lyons. "The majority of people will have built up savings and investments that can be used," he says.

"They will supplement that with income they receive over the next few years and pay the bills by using a variety of sources."

Savings and an overdraft to pay the school fees

Chris and Kate Trim are determined that their three children will all be educated in independent schools - even though they are juggling the demands of household finances with the costs of setting up a new internet-based business.

The couple, from Portsmouth, have so-far funded the school fees for their children through the combination of savings and an overdraft, as well as with the help of financial support from their close family while the venture gets off the ground.

But they eventually plan to invest in a portfolio of buy-to-let properties. The returns on these assets should help them meet the considerable costs of educating nine-year-old Gulliver, Amelia, seven, and five-year-old Katrina.

"I have spent the last year of my life working on the website which has been a tremendous gamble but I am hoping it will all pay off in the end," says website consultant Chris, 41.

Ironically, it was only when the couple realised how much money they were spending each year on school uniforms and other academic equipment that they had the business idea.

Their recently launched site - www.blazered.co.uk - effectively acts as an online classified advert section for all school-related items that people want to sell and is already building up a loyal following across the country.

For less than £6 you can subscribe and put your items up for sale - along with your contact details - while potential buyers can search for particular items and even stuff related to individual schools.

Cut the costs of going back to school

* Regardless of whether your child is in independent or state education, you can dramatically reduce the cost of sending your child to school by taking advantage of the war on the high street.

Major stores - such as Tesco and Asda - are slugging it out for supremacy in the market by cutting the cost of school uniforms. Among the best of the bargains are trousers and skirts for just £2.

* For other items - stationery, bags, sports equipment - it's worth shopping around your local area and on the internet for good deals.

* According to comparison website PriceRunner - www.pricerunner.co.uk - an average family with two children can cut their costs from £645 to £340 just by doing their homework.

For example, the prices charged for a pack of 20 Bic fine ballpens varied from £5.79 to £3.84 - a £1.95 saving, while there was a difference of £2.50 in the cost of A4 hardback notebooks.

* Young people from low income families are being encouraged to stay on in education through the introduction of new grants. The Education Maintenance Allowance is a weekly payment of £10, £20 or £30 depending on your household income. The money is intended to help with the day-to-day costs when you stay on at school or college.

* The cash is paid directly into the student's bank account if they stay on in education at school or college after their GCSEs - and is available during term time for any academic or vocational course involving at least 12 hours of guided learning.

* Making the decision to stay on can be very lucrative. According to the Learning and Skills Council, those who do can earn up to £4,000 more per year.