How To Plan For Your Child's Education

[Child's Future Planning Series]

Session 3: How To Plan For Your Child's Education

We are glad to have you with us for our 3rd Session on Child's Future Planning – and that is…

How To Plan For Your Child's Education

"An investment in knowledge pays the best interest." – Benjamin Franklin

As parents, it is natural to want the very best for your child - the best schooling, the best peer group and the best opportunities in life.

It is equally important to ingrain the importance of education, although the next-gen is smart enough, have an inquisitive acumen and are fast learners. Also, the spirit of competitiveness and vigour to achieve the pinnacle of success, whether in studies or in a work place, is very high among today’s children. 

But all this needs to be powered with enough savings and investing, if you wish to see their and your dream come true.

Today, as you may know, cost of education has shot up.

Schools and colleges are levying high fees to impart any kind of knowledge.

Besides, ancillary expenses such as tuition fees, stationary, uniforms, sports etc. have also gone up.

Thus ‘planning’ for your child’s education needs has become extremely important.

In this session we’ll introduce you to a sensible approach that can brighten your child’s future.

A 7-Step Approach To Plan Your Child’s Education

  1. Estimate the cost of education prudently – When you do so, distinguish between domestic (or local education) and global education. And whether the funds will be needed for an undergraduate course or a post-graduate course. This will help you estimate the amount accurately; but make sure to account for inflation as it erodes the purchasing power of your hard-earned money. Conservatively, you can estimate 8-10% inflation on education.
  2. Expect the unexpected – Meaning, don’t forget to rule out payments for other things apart from school fees such as coaching classes, entrance exams, payment towards educational excursions.

    And if your child plans to pursue education abroad or another state /city: travelling cost, hostel and accommodation cost, food, insurance etc. You see, all these things             add up to cost of education. To get a better sense of the potential expenditure, speak to parents of alumni, or alumni themselves and find out what the total cash outflow could be for the duration of the course.
  3. Assess your existing assets – This will help you know where you stand today to plan accordingly.  But if you’ve assigned assets to meet your other goals, avoid using them for your child’s education; as that’ll derail your other financial goals.
  4. Invest smartly to build the corpus – Once you’ve taken a count of your existing assets that can be mapped towards your child's education, you need to deploy your money smartly based on your investment horizon. Plus, save and invest regularly so that you don’t have to take loans, which can prove to be a costly proposition in the long run. Pay attention to your household budget, personal expenses, lifestyle expenses – cut the unnecessary expenses and/ or find an additional source of income. 

    For an investment time horizon of greater than 5 years, clearly park the money in equity mutual funds as they have the potential to provide higher returns over the long run.
  5. Focus on asset allocation – As you invest and build wealth keep a watch on your asset allocation. Make sure it’s just perfect to help you accomplish your child’s education goal. For a longer time horizon, higher equity allocation may prove worthwhile.

    But as you near your goal, you may rebalance your investment portfolio gradually towards fixed income or debt.

    A Well-planned asset allocation can not only scale up your portfolio returns exponentially but also act as a shield to protect its value during uncertain economic conditions and market volatility. 
  6. As parents ensure that you’re adequately insured – The demise of the breadwinner of the family causes a BIG setback to a child's education. Therefore, as parents you ought to ensure that you’re adequately insured. While indemnifying risk to life, based on a scientific approach called ‘Human Life Value’, insure yourself optimally whereby at least the tuition fees of your child will be met. Pure term life insurance plans  may be considered to indemnify risk to life for the cost-to-benefit they offer. Don’t commingle insurance and investments – keep them separate!

    Likewise, optimally insure for health, as not having an adequate medi-claim cover or not having one altogether, can potentially derail your financial goals if medical emergencies arise.
  7. Get started right away – The sure-fire killer to your goal is delay. While planning for your child's needs, it always pays to start early. This is because if you start saving and invest early, it will give you a longer time horizon to meet your financial goals (such as child’s education) and even build a bigger corpus enabled by the power of compounding.
A Case Study of Mr & Mrs Rajan

Mr & Mrs Rajan want to secure the future of their son, Kunal by providing him the best education.

Here are their personal details….

Personal Details
Name Age Income
Mr. Rajan’s Salary 35 years Rs 40,000 per month
Mrs. Rajan's Salary 30 years Rs 30,000 per month
Son, Kunal 3 years N.A.
Expenses Rs 45,000 per month
Surplus Rs 25,000 per month
(For illustration purpose only)

Rajan, 35, a salaried individual earns Rs 40,000/month, while his wife, 30, also a salaried person, earns Rs 30,000/month. So, together their monthly income is Rs 70,000.

Their monthly expenses on the other hand are Rs 45,000, leaving them with a surplus of Rs 25,000 each month.

Their assets are: 

S.No. Type of Assets Amount (Rs)
1 Equity Shares 125,000
2 EPF (Self) 200,000
3 EPF (Spouse) 90,000
4 PPF (Self) 500,000
5 PPF (Spouse) 300,000
6 Residential Flat 3,000,000
7 Physical Gold 1,000,000
8 Cash in Bank (Self) 200,000
9 Cash in Bank (Spouse) 100,000
Total 5,515,000
(For illustration purpose only)
Mr & Mrs Rajan fortunately do not have any ‘liabilities’.

Assessment of the assets:

The residential flat comprised more than 50% of their total assets, and since it is self-occupied, cannot be used for planning purpose.

They had a small amount of investment in equities.

They also had their individual EPF, PPF and Cash in Bank accounts. The Cash in Bank was mainly kept for contingency purpose. 

The physical gold was mostly in the form of jewellery of Mrs Rajan.

The financial goal:
  Current Cost (Rs) Time to Goal (Years) Future Cost (Rs)
assuming inflation of 10%
SIP Investment (Rs) per month
Kunal’s Graduation 800,000 15 3,341,799 6,623
Kunal’s Post-Graduation 2,000,000 19 12,231,818 13,974
Total 20,597^
For illustration purpose only
(Note: ^Investment return assumed at compounding rate of 12% per annum in equity mutual funds)

Kunal’s graduation…

They want to fund Kunal’s graduation in one of the premier institutes in India when he takes admission at the age of 18 years. The cost in present times is Rs 8 lakh.

Kunal’s post-graduation…

This goal is after 19 years when Kunal’s age is 22. The current cost to pursue this goal is around Rs 20 lakh.

But assuming inflation rate @10% per annum, the future cost of graduation and post-graduation will mount to around Rs 33.42 lakh and Rs 1.22 crore respectively.

What Mr & Mrs Rajan need to do?

To accomplish the financial goal, they need to invest Rs 20,597 per month in SIPs or systematic investment plans of equity mutual funds assuming they earn a compounding rate of return of 12% per annum.

This still leaves them with a surplus of Rs 4,403 (Rs 25,000 – 20,597).

Finally, before we wrap our today’s learning session, here are a few…

Points to Remember…
  • Educating your child well is one of your most important duties. Don’t forget that education is imperative to secure your child’s future.
  • But follow a sensible approach to fulfil your responsibilities towards your child’s education. Don’t follow the herd, because each one’s financial health, circumstances, goals; are different.
  • Start planning for your child’s future needs early. A longer investment horizon can facilitate better power of compounding.
  • Factor inflation in education slightly on a conservative side, because cost of education – both in India and abroad – is on a rise.
  • Think through your financial goals and prioritise or many of the other financial goals may not be achieved.
  • Don’t divert any investments already assigned for a particular goal towards education.
  • (And last but not the least), Endeavour to save more so that it leaves you with a greater investible surplus to accomplish many of the vital financial goals of life.

So to end our learning exercise today, we now invite you to test your learning by taking up this simple quiz (and win exciting prizes!)

Just Click On The Link Below.

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