7 Steps to Plan Your Child's Education
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. As Indians, it is strongly ingrained in us that education is everything, and we want our kids to go to the top schools for their chosen fields. But top schools charge top dollar, and if you want to make this dream a reality, there are some things you need to do:
- Are You Planning Local or Global Education?
Knowing the answer to this question can be a little tricky.
India has excellent schools for certain disciplines, but often it is harder to get into these schools than it is to get into a top school in the US / UK. So there are some things you need to keep in mind:
One of the things to ask yourself is do you want your child to have global exposure and education, or do you prefer to have your child remain closer to home?
This is to be considered alongside the question - are there good schools in India / abroad for the discipline your child is likely to choose?
Thirdly, do you want your child to do the undergraduate and post-graduate courses abroad, or just the post graduate?
Finally, what is the likely overall cash outflow in both cases?
- Historical and Current School Fees - An Estimate for Future Inflation
If you have a young child, then finding out what the school costs today is easy but deciding what rate of inflation to assume to see what it's going to cost in the future can be hard.
Often schools don't inflate their fees much on an annual basis, but will suddenly implement a jump in the fee, every few years. This comes to a higher average rate of inflation.
You might find that tuition fees increase anywhere between 8% and 12% on an average annual basis. It's easy to say - take the conservative assumption for your planning, but the difference can be huge.
Suppose a school charges Rs 25 lakhs (assuming INR) today and your child will likely attend in 5 years. With 8% annual inflation, fees in 5 years will be Rs 36.73 lakhs.
With 12% annual inflation fees in 5 years will be Rs 44.05 lakhs.
That's quite the difference, and planning to build a corpus of Rs 44 lakhs may not be easy for everyone.
Consider assuming a conservative rate of inflation, and allow yourself a buffer. You can assume 10% annual inflation on education and create a plan for your child's education accordingly.
- Always Expect the Unexpected
When your child finally does apply for school and get admission, you will probably find that there are a number of additional costs that you might have missed.
Right from flight tickets to food and accommodation, to pocket money, things will add up. But this is manageable. If possible, speak to parents of alumni, or alumni themselves and find out what the total cash outflow was for the duration of the course.
- Invest Smartly to Build the Corpus
There's a broad timeline you can follow when investing for this goal:
If you have less than 3 years left for the goal, avoid equity and gold, and invest only in debt and fixed income products.
If you have more than 3 years and less than up to 10 years left for this goal, invest between 40% and 60% into equity, 10% to 20% into gold to hedge the equity exposure and the balance into debt / fixed income.
If you have more than 10 years left for the goal, then you can invest up to 75% in equity, 10% to 20% in gold and the remaining small component into debt.
Keep in mind: don't dip into these investments for low priority expenses. If you want to renovate your home but have channelized all your cash flows towards your child's education, you need to plan your finances better, preferably with the help of an expert planner. Always have enough of a buffer to take care of other expenses along the way.
That being said, don't dip into
your retirement corpus to fund your child's education. Your retirement should be one of your top priorities.
- Remember to Insure Yourself Adequately
One of the biggest potential setbacks to a child's education is the demise of the breadwinner in the family and the lack of insurance.
Ensure that you have enough life insurance by way of a simple term plan to cover at least the tuition fees of the school your child will possibly attend. If insurance is invested correctly and grown safely, your family life goals can still be achieved. But that can only happen if you have the right amount of insurance for your family's goals and regular expenses to still be met.
- Avoid Pre-Packaged Child Plans from Insurance Companies
To simply put, a child plan is designed to provide financial security to the child in case of the insured parent's demise. Also these plans are commonly used to provide for various objectives ranging from education to marriage.
But while they may be easier, are they a good idea? At PersonalFN we believe in keeping insurance and investments separate. Insurance products such as child plans often come with higher charges (and much higher commissions to the agent who sells you the plan) than investing in a straightforward mutual fund. If you invest in the right basket of mutual funds and build a strong mutual fund portfolio for your goals, and supplement it with the right amount of term insurance, you will save on charges and commissions.
- Get Started Right Away
The sure-fire killer to your goal is delay.
Regardless of how old your child is and how much time you have left for the goal, start investing for it today itself. The earlier you start, the less you'll need to invest each month to achieve the same amount of money at the end of the goal.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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