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Are You Among The 35% Parents Who Will Not Be Able To Finance Their Child's Future? - Outside View by PersonalFN

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Are You Among The 35% Parents Who Will Not Be Able To Finance Their Child's Future?
Nov 1, 2018

Every parent wants the very best for their child, from the best lifestyle to the best infrastructure to Ivy League schools, nothing short of the absolute best.

But the "best" costs money and an Ivy League education costs the moon.

A survey by HSBC titled, "The value of education: price of success", revealed some scary and startling facts about the preparedness of the average Indian parent. For instance, did you know that...

  • 49% of parents have taken a second job to fund their child's higher education; or
  • 60% of parents have foregone annual vacations; or
  • 35% of the parents are concerned that there is a high probability that they will not be able to fund their child's higher education.

These statistics, scary as they may seem, are unfortunately a sad truth for a vast majority of parents. In fact, Parents are worried and rightly so, because the average household inflation in India over the last 10 years has been 6.52%, whereas the education inflation during this timeframe has been a staggering 11%.

To provide some perspective of our changing times, the table below depicts the future value of top courses at different points in time, domestically.

Table 1: Changing time: How inflation can play a spoilsport
Course Engineering Medicine Arts MBA
Current Fees (2018) 10 lakhs 25 lakhs 2 Lakhs 20 lakhs
Future Value (after 5 years in Rs) 16.85 Lakhs 42.12 Lakhs 3.37 Lakhs 33.70 Lakhs
Future Value (after 10 years in Rs) 28.39 Lakhs 70.98 Lakhs 5.67 Lakhs 56.78 Lakhs
Future Value (after 20 years in Rs) 47.84 Lakhs 1.19 Crores 9.56 Lakhs 95.69 Lakhs
*assumed inflation rate 11%.

Just to reiterate, a medical degree costing Rs 25 Lakhs today will cost you Rs 42.12 lakhs in the next 5 years!

While the cost and demand for domestic Ivy League schools and colleges have doubled in the past decade, the cost of international education has quadrupled.

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International degrees have garnered a lot of steam in the last decade, as it gives your child a global platform to learn, develop, and compete, not to mention the chance of securing that big 7-figure pay-check with a big corporation.

While a 7-figure pay-check may seem lucrative, any international course costs a 7-figure amount as well.

Table 2: The average cost of education of most sought-after courses internationally
Course Engineering Medicine MBA
Current Fees (2018) (in Rs) 30 lakhs 75 lakhs 40 Lakhs
Future Value (after 5 years in Rs) 50.55 Lakhs 1.26 Crores 67.40 Lakhs
Future Value (after 10 years in Rs) 85.18 Lakhs 2.12 Crores 1.13 Crores
Future Value (after 20 years in Rs) 1.43 Crores 3.58 Crores 1.91 Crores
*The above figures are inclusive of stay and food and travel.
**assumed inflation@11%p.a.

While one option to combat this bourgeoning inflation on education can be to enrol in government-run school and colleges. However, the quota system and bureaucratic hurdles could get in the way of your plans.

Therefore, the best way to combat this growing education inflation is to simply "plan".

Let's look at a simple case study to understand how you can go about planning for your child's future.

Mr Ram (40), a chemistry teacher lives in Mumbai with his spouse and a one-year-old daughter, Sia. Being a teacher himself, Ram is well-aware of the rising cost of education and hence his main priority is to plan for his daughters' higher education. So, once his daughter is 18, she can pursue a career of her choice without any compromise and financial burden.

Let's ascertain how Mr Ram can achieve his goal.

Table 3: The plan details
Daughter’s current age 1 Year
Average current cost of an international course (tuition + stay + food) Rs 50,00,000
Years to the goal 17 Years
Inflation Rate 11%
Future cost of an International course (tuition + lifestyle) Rs 2.94 Crores
Monthly Investment to be required to achieve the goal Rs 31,353
*assumed return on investment@15%.

Today's Rs 50 Lakhs will become Rs 2.94 Crore by the time Sia is 18 years old, keeping in mind an education inflation of 11%.

While Rs 2.94 Crore may seem to be a daunting task, a simple disciplined monthly investment of Rs 31,353 will make sure that Sia has enough corpus to pursue her passion without monetary hurdles. A small disciplined decision by her father has secured Sia's future.

While, Mr Ram was a prudent and prepared parent, his friend Mr Shyam proved to be an unprepared parent. Let's now look at Mr Shyam's story.

Mr Shyam, 35 is an accountant in an MNC and lives in Mumbai with his spouse and 10-year old son, Arjun. Arjun wants to pursue a doctorate in mathematics from MIT, USA.

Let us see, how an un-prepared approach to investing will hamper Mr Shyam's chances of sending Arjun abroad to pursue his academic interests.

Table 4: The plan details
Son’s current age 10 Year
Average current cost of an international course (tuition + lifestyle) Rs 50,00,000
Years to the goal 8 Years
Inflation Rate 11%
Future cost of an International course (tuition + lifestyle) Rs 1.15 Crores
Monthly Investment to be required to achieve the goal Rs 61,971
Assumed rate of return 15%.

Today's Rs 50 Lakh will become Rs 1.15 crore in the next 8 years, at an inflation rate of 11%. To achieve Rs 1.15 crore in 8 years, Mr Shyam has to make a monthly investment of Rs 61,971.

Mr Shyam can unfortunately invest only Rs 40,000 per month, meaning the maximum corpus that he will be able to create will be Rs. 74.37 Lakhs, leaving a steep shortfall Rs 40.85 Lakhs.

This sadly means that Mr Shyam will either have to take up a second job, or curb his expenses drastically, or become a part of the 35% parents who cannot fund their child's dreams.

We can give you all the statistics you want, but the underlying truth is simply this: "The cost of education is on the rise, and if you fail to plan, you are planning to fail".

Hence make sure you take the following steps in the right way and take complete control of your personal finances.

  1. Start early - Don't procrastinate: The first step in achieving even the most daunting of goals, is to start -and start early! Like Mr Shyam, don't wait 8-10 years to start the planning, start as soon as your child is born. This will give you enough time to accumulate a corpus systematically without any stress on your budget and other financial plans.
  2. Invest in sound, ethical, and unbiased advice: While creating a corpus amounting to crores, don't cheap out on paying an advisory fee. Every good advice has a cost, be prepared to bear it and every bad advice has a price, be prepared to pay it.
  3. Choose wisely: Choose your advisor wisely, choose your investment avenues wisely, and most importantly be disciplined. After all, kids pick up a lot from their parents.
  4. Disciplined Investing: Once you start saving for a particular goal, never dip into these savings to fund any other wants or necessities. A small leak (withdrawal) may prove to be detrimental in achieving your financial goals.
  5. Be patient: Remember that you are investing for the long haul and therefore don't lose your sleep over a six-month bad phase in the market. Invest in a systematic disciplined manner and let compounding work its magic.

We sincerely hope that you are not in the 35% demographic of parents who are unsure about funding their child's future. But if you are, relax, step back, and get in touch with PersonalFN's financial guardian on 022-61361200 or write to info@personalfn.com. You may also fill in this form, and soon our experienced financial planners will reach out to you. Remember the first learning, don't procrastinate.

As a parent, you can either be prepared or unprepared.

The choice is yours.

Author: Deepika Khude

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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