How to go about planning your child's education
"Education is the most powerful weapon which you can use to change the world." ? Nelson Mandela (an anti-apartheid revolutionary and politician)
Every parent wants his son/daughter to be well settled in life- to have a high-paying job, a decent house and a joyful life with lots of fun-filled holidays. Most of these aspects of life come with a cost attached, and to be able to afford it your kids need to be smart and educationally qualified. You give the best of everything in life to your child- the best clothes, the best vacations, the best games etc. But you see, the most precious and one of the best assets you can gift your child with is a good education. Only a sound education can empower your child to achieve the necessities and comforts of life and enable them to give the same to their children as well.
No matter how old your child is it is never too early to plan for your child's education. Especially if you want your child to attend good schools and colleges, you must begin planning soon as the education costs are only going to rise.
You can consider the following points while planning a bright future for your little one:
- Cost of Education: The first thing you need to do is determine what is going to be total cost of education for your child. This depends upon various factors. 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 course? Finally, what is the likely overall cash outflow in both cases? And while calculating the total expense, it is important to determine what would be the future cost when your child will actually be going to high school or college or undertaking the post-graduate course.
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. Suppose a business school charges Rs. 25 lakhs today and your child will likely attend in 5 years from now; with 8% annual inflation, the fees you will end up paying would be Rs. 36.73 lakhs after 5 years. And say if inflation increases, say at 12% annual inflation you would end up paying even more higher i.e. Rs. 44.05 lakhs after 5 years. That's quite a difference, and planning to build a corpus of Rs. 44 lakhs at one go may not be easy for everyone. So, you must be realistic about assuming the inflation factor and start planning early.
- Expect the Unexpected: Whenever your child enters high-school there might be many other expenses apart from school and tuition fees. These other expenses may seem small but when all taken together they will add up to a huge figure. This is even more relevant in the case where you want your child to undertake any graduate or post-graduate courses overseas. This is because when your child finally does apply for an international school and gets 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 and insurance, 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. This will give you some idea regarding the potential expenditure. Even after forecasting and planning for all of these expenses, it would be prudent to keep some buffer which might come into use for unforeseen expenses.
- Assess Existing Assets: Before you blindly start saving for your goal (child's education), it is prudent to first check what investments are already available in your portfolio that can be mapped to this particular goal. For example, Mr Shah needs a corpus of Rs 1.20 Crores for his son's education in 3 years time. To achieve this corpus if Mr Shah were to invest in debt (due to the risk involved in equities) he would have to invest Rs 2.98 lakhs per month in a debt mutual fund, earning 7% post-tax returns. This would not be feasible considering Mr Shah has other goals that he also needs to invest for, the biggest one among these being his own retirement. Hence he should first analyse any investments that have been already been made which might help him accumulate the desired corpus. So if Mr Shah has invested in his son's PPF or diversified equity mutual funds or fixed deposits with a view of utilising these savings for the child's education, then he should first assess the current value of these investments before doing any further investments.
However, an important thing you must bear in mind is you must avoid dipping into the investments made for your other financial goals, especially retirement corpus while you want to fund your child's education as well. That being said, you must also not dip into the investments made for your child's education for other low priority expenses such as renovating your home etc.
- Asset Allocation: Although you have already built some 'x' amount of corpus till date, you might need to rebalance this existing corpus depending upon the attractiveness of the investment opportunities and the time left for your child to enter school or college. If you have many years left (say 10 years plus) for the realisation of your financial goal then it would be prudent to invest the maximum percentage of your funds (75%) in risky assets such as equities (either through the direct route or through equity mutual funds) and the remaining in debt and cash. However when you have more than 3 years but less than 10 years left for goal realisation then balance prudently between assets. Consider investing 50%-60% in equities, and balance it wisely with the remaining in debt and cash. However with a time horizon of less than 3 years towards the maturity of your goals you must completely avoid risky assets and invest 100% in debt and fixed income products. 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.
- Invest Smartly: Once you have made an account of the already existing investments which can be mapped towards your child's education, you might need to save and invest on a regular basis to fill in the gap. This is imperative as in the absence of the requisite savings; you would probably take loans and will land up increasing the debt component in your portfolio. Although taking debt is not a taboo activity, you must try to save and utilise your own funds for accomplishing goals so as to avoid paying EMIs later which might be way more costly than the original loan amount.
Hence try to save a larger proportion of your monthly income if your current savings are not adequate. In case if you find it difficult, the first thing you should do is reducing your household and personal expenses, but snapping the unnecessary ones altogether or find an additional source of income. Remember that saving alone is not going to help you achieve your target as the inflation bug eats into your savings and erodes their value. You need to invest this hard-earned money in suitable investment avenues depending upon your asset allocation pattern and risk appetite to beat inflation and grow the value of your portfolio.
- Adequate Insurance: Have you thought what will happen to your dream of giving your child the best possible education, in case you have an untimely death or meet with an accident that impairs your physical ability to earn? 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 and health insurance to cover atleast the tuition fees of the school your child will possibly attend. You see, there are ways to achieve your family goals even in your absence. 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 plans from insurance companies: You might have heard about child plans that are designed to provide financial security to the child in case of the insured parent's demise. These plans are used to provide for various objectives ranging from your child's 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 directly in various investment avenues (shares, mutual funds, PPF etc.). If you invest in the right basket of assets and build a strong portfolio to meet your goals, and supplement it with the right amount of term insurance, you will save on charges and achieve your goals smoothly.
By following the above points you will gain clarity regarding achieving your goals and fulfilling your responsibilities towards educating your child well. However an important point to draw is that you must start working towards your goals as soon as possible. The more you delay, the more you would need to save and invest each month to accumulate the same amount of money at the end of the goal.
PersonalFN believes that educating your children is one of the most important duties you as a parent have towards them. Don't forget that education is imperative for securing your child's future. Hence regardless of how old your child is and how much time you have left for this goal, you must start saving and investing for their education from today itself. And, as many of you might have several doubts and uncertainties about how to plan and where to invest for meeting these goals, it would be prudent to take the help of an experienced investment consultant, who might help you manage your finances better.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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