As parents, you will agree that the best thing you can do for your kids is to support them get a good education. Despite high tuition costs, good education is a major achievement for them and helps them land decent jobs with higher earning power.
But it’s an expensive goal
And may seem to be an impossible task sometimes.
Take a look at this infographic of cost estimates to raise kids in India.
About 60% of the cost is spent on educating the child. Don’t let the outrageous numbers dishearten you though. With careful planning and discipline you can handle this goal easily.
Just saving for your kids’ education is not enough
Just saving for your kids’ education is just not enough, you need to plan and invest for the amount to grow. The earlier you start the better results you get and easier for you to manage.
You may wonder why saving small amounts regularly is not enough for your kids’ education, while your parents and their parents managed so well with the same strategy, so what is different now.
Last two decades have seen tremendous development in science & technology resulting in surge of career choices, that need expensive technology for educating, increasing the overall cost of good education.
With change in lifestyles and aspirations more parents want to invest in teaching kids additional skills that make their kids all-rounders if not young superstars.
Increasing population and double incomes further raise the cost of high demand professions. More parents are sending their kids abroad for higher education since it improves their prospects of landing a decent job abroad. (see rough cost of studying abroad in the following table).
And most importantly, to beat the current inflation rates, just saving is not enough.
Estimate the target amount of your goal
Every child is unique and so their education requirement is different. Plan and invest for each separately. Like any other life goal, you need to convert it to financial goal estimating the total costs needed. Next calculate the future value needed taking into consideration the time remaining and inflation. This is the target amount required for your kid’s education.
Based on your target amount and the time horizon you have at your disposal, your financial advisor (this could also be the salesperson of the mutual funds) may suggest to you several investment options and the amount that you would need to invest monthly.
Being aware of the basic process, will enable you to take an informed decision, rather than just going along with the other person’s suggestion. It will also reduce the chances of investing wrongly. Yes, there are investments that may be wrong for you if they do not help you achieve your goals on time.
A two-pronged strategy to reach the target amount
To accumulate your target, you may need to adopt a two-pronged strategy of saving and investing monthly in consistent or growing amounts as needed.
Making a monthly budget and writing down monthly spending is a sure shot way to keep your expenses in check. Once it is all recorded, you can decide if there is a need to cut back on expenses.
If needed start by cutting on entertainment tactically. Carry your own snacks to movies. Don’t worry, the supreme court of India recently ruled in favour. Reduce on dining out bills by ordering take-away and home deliveries when you can. Brew your own coffee at home or at office, rather than ordering at Starbucks.
Prefer cash payment to credit cards, to reduce unnecessary added cost from your purchases.
Basic knowledge of finance goes a long way to help you manage your money better. Not only will you be confident of your investment plans, but also know where to invest.
Compare the available investment options before investing
And you may feel it proper to invest in a children’s education fund, but the truth is that the yield or returns from the children’s funds may not be sufficient to achieve your objectives. And there is no rule saying that you cannot invest in other mutual funds.
Investments are neither equal nor similar in their risk reward ratio. Less risky give lower returns and high return funds will be riskier. You should decide your risk reward ratio based on how many years remain to your goal and avoid risk.
Growth of investment varies from fund to fund even in the same sector. Many people decide based on the mutual fund’s past performance. Broadly, the mutual funds are categorized into conservative (8%), mixed (10%) and aggressive (12%) returns. Equity may give much higher returns, but it is not advisable without good knowledge of stock analysis.
An excellent approach to compare two different investments with different risk return ratio and time frame is to compare their CAGRs (compound annual growth rate formula available in MS EXCEL).
The earlier you start the better results you get and easier for you to manage.
If you are an early bird, you may assume high-risk investment, getting higher returns as you have time factor in your favour.
Take advantage of the power of compounding. The multiplier effect in the power of compounding comes from investing for longer term.
You can save tax by planning your investments and taking advantage of various tax saving schemes. The amount saved thus is additional earnings.
When you start early you can accumulate bigger amount in the long term. This is near impossible when you start late. Moreover, the early bird beats the inflation to a certain extent.
You develop improved spending and saving habits, as a consequence of goal planning.
If your goal is close (1 – 5 years away)
The earlier you start planning and investing for your kid’s education, the better results you get. However, it is never too late to plan your kid’s education. Sometimes it may cost you more, but you can still work out a solution.
The strategy here should be to protect your capital and move the amount to low risk funds or debt funds. Do not even consider long term or illiquid investments that may not redeem on time, however high the returns promised. It is better to keep funds in low risk mutual funds, debt funds, recurring deposit accounts or fixed deposits that can be redeemed prematurely.
If you started late on your investment plan or incurred loss by wrong investment, you may be short on target money. If this is the case, take from savings of other less urgent goals like apartment purchase or your dream car. Alternatively, take an education or personal loan to fill the gap. Taking an education loan has tax benefits. With careful planning and discipline you can still handle this goal well.
As parents, good education is the best you can give your children.