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Session 25: Life Goal 2 - Planning for Child's Education and Marriage

We are glad to have you with us for our twenty-fifth session - Life Goal 2 - Planning for Child's Education and Marriage

As a parent, you want to give your child the best of everything. Be it the child's education, lifestyle and even a grand marriage. But as you may be aware, the cost of everything is going up. So are you saving enough and planning wisely to give your little bundle of joy what you've been dreaming of and what he or she deserves? Well if not, you better get started right away!

This session of money simplified brings you a refreshed approach for planning your child's future - be it his / her education and / or marriage needs. So in this session we are going to handhold you and explain how with prudent and effective planning, your dream of providing the best (but within your means) to your child can indeed come true.

So, let's get started...

Defining Goals

Well, the first step in the planning process is defining your financial goals. So while planning for your child's future is a broader objective, you need to define it further as to what you intend to plan for - child's education or marriage needs.

Let's take the first one...

  • Child's Education (...Here you need to further be clear about which stage of their education you want to plan for...)

    • Graduation
    • Post-Graduation

    As Nelson Mandela said, "Education is the most powerful weapon which you can use to change the world"; so as parents you want to give the best quality education (but within your means to the child). Today's generation, as you may already be aware, is very smart. Their inquisitive acumen makes them fast learners. There is a spirit of competitiveness amongst today's children and a vigour to achieve the pinnacle of success, whether in studies or at the work place. But, to follow one's dream and make it into a career can be a very costly affair...and as parents you need to be ready for that. Depending upon the aspirations and acumen of the child, whether to be a doctor, lawyer, engineer or a finance professional; you need to plan well. And remember that no matter how old your child is, it is never too early to start planning for your child's education.

    Likewise, while planning for your Child's Marriage you as a parent, in consultation with your child, need to be clear whether the wedding would be simple or done with much pomp and style.

  • Child's Marriage

    • Simple
    • Lavish

    As a parent you want your child's wedding to be one of the most memorable occasions filled with fun, happiness and music. But you need to be within your means as well while planning your child's wedding as the cost associated with it should not create a sour memory.

    You see, there was a time when a wedding was only an auspicious day for the holy union of two families which was done at a decent and rational cost. But today, weddings have also become an occasion to display one's social stature and monetary wealth. Some people believe that if they do not spend liberally on their child's wedding, it will become difficult for them to face society. And in the bargain, they drain out most of their financial resources or even take loans, putting their retirement needs at stake.

    It is noteworthy that some things which are a necessity to a few could also be a luxury to others. It is for you to decide what are your "need to have" things and what things can be "easily avoided". Having a practical approach to all wedding related expenses is necessary as that will enable you and your family to live a stress-free financial life. Again remember: the earlier you start saving and investing for your child's wedding, the lesser you will need to set aside per month to achieve your objective.

    The next step in the planning process is to determine the age of your child at the time of the occurrence or goal realisation.

Age of Child at the time of Goal

Child's Graduation - 18 years

Child's Post Graduation - 21 years

Child's Marriage - 25 years

Generally we have seen investors envisaging the requirement of funds for their child's graduation needs at 18 years of his / her age. Assuming the child will take 3 years to complete his or her graduation, they want to plan for a 2 year post-graduation course at 21 years and finally want their child to get married by 26-27 years.

So in this process you see, it is imperative to recognise the number of years remaining until the goal, which is calculated as...

Number of years remaining towards Goal

Number of years remaining towards Goal = Child's Age at Goal - Child's Current Age Example:

Child's Current Age = 5 years

Child's Graduation Age = 18 years

Number of years remaining towards Goal = 18 - 5 ? 13 years

Say your child's current age is 5 years and you require money for his graduation when his age is 18 years; you have 13 years remaining until the goal.

Therefore the current age of your child and his / her age at the time when the financial goal realises, will define the number of years remaining towards the goal. It will determine whether your child's financial goal is short term, medium term or long term.

Then the next step is to determine the...

Amount Required in Today's Terms for the Goal

Child's Graduation = Rs 5 lakhs to 15 lakhs

Child's Post-Graduation = Rs 10 lakhs to 25 lakhs

Child's Marriage = No limit

You see, it is imperative to recognise this; because on the basis of this, the value you require in the future, i.e. at the time of the goal, is determined.

Over the years, while dealing with clients we have observed that graduation costs in today's terms are estimated somewhere around Rs 5-15 lakhs, while post-graduation costs around Rs 10-25 lakhs and in the case of a child's marriage needs, either the amount is not thought of precisely or a limit to the same is not stated.

But as inflation tends to erode the purchasing power of your money, you will need to consider the present value while estimating the future value, i.e. at a time when the goal is likely to occur or realise.

Future Value of Child's Education and Marriage Cost

Inflation for Graduation / Post-Graduation = 10% to 15% per annum
Increase in Marriage Cost = 8% to 12% per annum

While planning for a child's education needs an inflation factor of 10-15% p.a. will be fair to assume taking into account the pace at which education fees are on the rise. On the other hand for a child's marriage needs, an inflation factor of 8-12% p.a. would be fair to assume. You see, accounting for inflation factor while calculating the future value of the goal will help you arrive at a more realistic value for meeting your child's future needs.

  Current Cost Years to Goal Inflation Future Value
Graduation 5,00,000 13 10% 17,26,136
Post-Graduation 10,00,000 16 10% 45,94,973
Marriage 20,00,000 20 8% 93,21,914
Total 35,00,000     1,56,43,023
(This table is indicative and for illustration purpose only)

Here is an indicative calculation of the future value of a child's education and marriage. Considering inflation on education @ 10% and @ 8% for marriage, in 13 years' time the cost of graduation would increase from 5 Lakh to 17 Lakh and the post-graduation cost of Rs 10 Lakh would increase to around Rs 46 Lakh in 16 years' time. Similarly over 20 years, Rs 20 Lakh budgeted for a child's marriage would inflate to Rs 93 Lakh if inflation on marriage is assumed @ 8%.

Then you also need to...

Prioritise Your Goals
  • Low
  • Medium
  • High
  • Very High
We understand that all the financial goals pertaining to your child's future needs are extremely important. But in the journey and process of achieving you need to prioritise your financial goals; because for all practical reasons they may not be achieved at one time, nor would the occurrence of the same be at one time. Therefore you need to decide which goal is most important for you and for which goal you can compromise on with respective to time and amount. Hence in order to do this, you need to categorise all the goals pertaining to your child's future needs into low, medium, high and very high categories. This will help streamline your finances and prudently plan your child's future.

After having recognised your priorities for the goal, you need to...allocate your investments or assets towards each goal. Do not forget to have the right asset allocation while you invest...

Asset Allocation As Per Years to Goal

Time Horizon Equity Debt Gold
0-3 years 10% 85% 5%
3-5 years 40% 55% 5%
5-8 years 55% 35% 10%
8-10 years 70% 20% 10%
More than 10 years 80% 10% 10%
(This table is indicative and for illustration purpose only)
Source: PersonalFN

You see, any fresh investments you make towards your child's future needs - be it education or marriage - require to have a prudent asset allocation. Depending upon the time horizon for your child's future needs you can decide the kind of asset allocation you should maintain by referring to the above table.

In the table you can see that if you have a longer time horizon for your child's future, the higher will be your allocation towards Equity. But when the time horizon is less or you are just a few years away (about 3 years) when you require the money for the goal; your allocation should be skewed towards Debt.

Therefore to reap the benefit of a longer time horizon, which facilitates you to invest in equities; start planning for your child's future needs now to earn a bigger pie for his / her financial goals.

You should also...

Allocate Your Existing Assets towards the Goal

Goal Time Horizon Equity Shares/ Equity Mutual Funds Fixed Deposits/ Debt Mutual Funds Gold / Gold ETFs
Child's Graduation 3 Years 10% 85% 5%
Child's Post Graduation 6 Years 55% 35% 10%
Child’s Marriage 10 Years 80% 10% 10%
(This table is indicative and for illustration purpose only)
Source: PersonalFN

Being in the earning and asset accumulation phase, you as a parent might have accumulated some assets over the years. Now these need to be mapped towards your child's future goals - be it his / her education and / or marriage. So remember, the major portion of your debt investments such as Debt Mutual Funds, Bank FDs, etc. can be mapped towards a near-term goal like child's graduation, provided you are a few years away (about 3 years) when you require the money for the goal.

A major portion of your existing equity investments such as Equity Mutual Funds and Equity Shares can be mapped towards goals which are farther away such as a child's post-graduation, and marriage needs, where the time horizon for realisation is over 3 years. You can simultaneously maintain some allocation towards debt mutual funds and gold ETFs.

You can also keep aside your existing investment in Physical Gold and Gold Mutual Funds for your child's marriage. If you have a higher time horizon, and as you need to keep pace with inflation, based on your risk appetite you can invest a major portion of your assets in equities through equity mutual funds.

Once you have decided the asset allocation, you need to know how much amount you need to invest. An Investment can either be made one time in a lump sum, or monthly or yearly. You see, calculating the required investment will give you an idea whether all your child's goals are within your reach or you need extra effort to achieve the goals.

Mutual Funds Category across Asset Class

Risk Appetite Equity Debt Gold Time Horizon
Low Balanced Fund Liquid / Money Market Fund   Short
  Floating Rate Fund  
Large Cap Income - Short Term Gold Fund
Moderate   Income - Long Term   Medium
Multi / Flexi Cap   Gold ETF
  Gilt Fund  
High Mid and Small Cap Monthly Income Plan   Long
Source: PersonalFN

You see, we have in the past sessions, told you about various categories of mutual funds that have specific investment objectives and are designed to cater to various investment needs and hold different levels of risk-reward relationship. Once you are aware of the amount to be invested towards achieving your respective goals and the kind of asset allocation, you need to judge your risk appetite and consider your investment time horizon before investing in mutual funds. Longer your time horizon, higher the risk you can take. Based on your risk appetite and investment time horizon, you can decide the kind of mutual fund schemes suitable for you, where you can invest and get started towards achieving your child's future goals. You can choose the scheme category on the level of risk you can take. You need to decide if you want to create a risky or a risk averse portfolio.

Points to Remember...
  • Define your Child's Goal carefully

  • Determine the Child's Age at which you want to plan for the respective goals (...such as graduation, post-graduation and marriage)

  • Determine the Amount required for the goal (...Be rational! Do not overestimate or underestimate, as it may derail your plans)

  • Consider the Inflation rate ( it will push up the cost of your goal in the future)

  • Determine the Asset Allocation required for each goal ( it will make your portfolio healthy and help it sustain volatility seen in any of the asset class)

  • Calculate the investment amount required to achieve the goal ( need to get this right as this is a kind of seed capital which would grow towards achieving your future goals)

  • Start Investing in suitable investment options like Mutual Funds to reap benefits ( they cater to various investing needs)

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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Disclaimer: The contents of this document are only for informative purposes and are not to be used or considered to be an offer to sell or buy units of Franklin Templeton Mutual Fund schemes. This video is for information purposes only, provided on an 'as is' basis. Nothing in it should be construed as personal financial advice. You are responsible for your own investment decisions and you should seek advice concerning suitability from your investment adviser regarding any of the investments mentioned. The video is for personal non-commercial use only and may not be copied, stored, redistributed or broadcast in any way. We recommend you read the complete Terms of Use.

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