Education is no cheaper. It is becoming costlier by the day both in India and Abroad.
Guess! All your savings of last 10-15 years is going to get depleted or completely utilized in a span of 3-4 years. The expenses start as early as Class X, when you start thinking of enrolling your child in some test preparation classes for IIT, NEET, BBA etc .if you are looking at India or for SAT/ACT if you are planning for abroad. Coaching institutes themselves cost nothing less than few lakhs today for 1-2 years prep course.
Followed, will be the hefty fees you need to pay per year for all those reputed private universities you wish your child could make it to. The college fees for 3-4 years can run into several lakhs in India to about a Crore or more if you are looking at Abroad. And, not to mention there are still incidental costs like lodging, boarding, vacation travel for kids, books, professional certifications etc.
Thankfully for all those parents who are on short of funds, loans come as a rescue but than it is always easier to take loans but very difficult to repay them back and you don’t want to spend rest of your working life overburdened with the interest and EMIs.
As a parent, I wish you to ask these questions to yourself:
- Have you planned the corpus for your child’s education?
- Have you earmarked it separately?
- Will it be enough to cover for all expenses that you are going to have?
- You have two kids coming in High School Back 2 Back, have you planned for second one?
If the answer to any one of these questions is a “NO”, then you DEFINITELY need to spend 5 minutes to READ THIS FURTHER.
Let me make this easier for you by providing a STEP BY STEP Guide to plan for your child’s education.
1. Put a Plan in Place (Calculate the amount needed, as this may vary from person to person depending upon one’s own aspirations)
Start by making a target of the amount of funds you will need. This might itself be a difficult and a tricky task. How do you know today, how much will you need in future?
There will never be a fool proof way to calculate but there will never be a better time to start then Now.
It will be difficult for you to plan what course will you child pick in future, so start by keeping 2-3 career options in mind and the approximate cost for each of them. Then take the average of the 3 costs and start from there. So, lets say the average cost you came up with is Rs.25 Lacs.
2. Once, you have estimated how much you need. Now define how much you need to save on month on month basis with inflation in mind.
Now, first thing we need to do is keep the minimum inflation of 8% in mind and see how many years from now your ward will need to go to higher education. Let’s say it is 5 years from now.
So, by a bare minimum estimate you will need approximately Rs. 36 Lacs.
Now, estimating that in best case scenario your investment will give a return of 12% compounded annually then also you will need a saving/investment of Rs.45000/- per month to get to Rs. 36 Lacs in 5 years.
Now, it is to decide where to invest to get 12% return so that you are able to reach your milestone in 5 years.
3. Step 3 is to decide where to invest so as to generate about 12% returns so that you land up at your desired education corpus.
Though, my intention with this article is not to promote any particular means of savings however keeping in mind that we are one of the fastest growing economies in the world, generating 12% return over a long term of 5 years or more is not impossible while ensuring that investment is safe.
One should seriously consider SIP (Systematic Investment Plan) of reputed Mutual Funds. MF is reasonably safe as long as one is disciplined in his/her investment habits. Equity as a class has the potential to give you better returns than any other investment class over the long term. There are MF which can suit every kind of investor depending upon your risk profile.
However, most good fund houses have given better returns than benchmark index over the long term, 5 years or more.
You can have a diversified MF portfolio, 40% in Mid-Cap, 30% Large Cap and balance in Debt Funds. This kind of portfolio will keep your investment safe and should be able to generate 12% or more returns.
One should however keep in mind that you should start a Systematic Removal Plan or Systematic Transfer Plan, minimum two years prior to the time you will need funds. This way, slowly you will be able to de-risk all the investments you have made while ensuring that you still enjoy good returns on the investments till the last day.