Parents are increasingly prioritising their children’s higher education, driven by a growing awareness of its increasing costs. Consequently, they recognise the importance of diligently planning their investments well in advance to secure the adequate funds.

However, parents often encounter financial challenges that hinder their dreams. Some mistakes can lead to a shortage of funds when it’s too late to make amends. To prevent such issues, parents must pay attention to the planning for their children’s higher education.

Here are five things to avoid when planning to fund your children’s higher education:

Starting Late

Higher education for children is a long-term financial goal, spanning 18 to 20 years. Many parents mistakenly believe they have ample time to plan and delay their investments. However, delaying even by a year can significantly impact your investment’s compounding effect and necessitate a larger investment.

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For example, if you start investing — when your child is born — with a 12% average rate of return, you’ll need to invest slightly over Rs 5,400 monthly to reach a goal of Rs 50 lakh in 20 years. But a one-year delay increases this monthly requirement to nearly Rs 6,200, and a delay of five years raises it to about Rs 10,500. A 10-year delay escalates the monthly investment to a staggering Rs 22,300—more than four times the initial amount. Starting early, therefore, is crucial for success.

Adhil Shetty, CEO, Bankbazaar.com, says, “The cost of education, especially higher education, is skyrocketing with each passing year. By planning ahead, you can spread the financial burden over a longer period, making it more manageable. Secondly, starting early allows your investments to benefit from the power of compounding. Over time, the returns on your investments can generate substantial growth, significantly reducing the amount you need to save each month. Thirdly, unforeseen financial emergencies or fluctuations in income can disrupt your child’s education plans. Planning in advance provides a financial safety net, ensuring you have the necessary funds when needed.”

Ignoring Inflation

Failing to account for inflation can lead to underestimating the required funds. Today’s course fees of Rs 10 lakh, for instance, will undoubtedly rise in 20 years. A simple calculation with an average inflation rate of 5% would inflate the fees to over Rs 27 lakh. Higher inflation rates would result in even higher costs. Consider inflation when determining your future financial requirements as it’s the first step in successful investment planning.

Shetty adds, “It’s crucial to consider inflation. Education costs tend to rise consistently. By forecasting these increases and planning accordingly, you can protect your savings from losing value over time.”

Overlooking Additional Expenses

Parents often focus solely on tuition fees and overlook other associated costs like accommodation, food, and lifestyle expenses. These peripheral needs should be factored into the overall funds required for higher education. Failing to plan for these costs, which will increase with inflation, can significantly affect your investments.

Opting for Traditional Investments

Given the long-term nature of higher education funding, it’s advisable to embrace growth-oriented investments like equities, either directly or through equity mutual funds, for better returns. Traditional investment avenues with lower returns may hinder your progress and leave you vulnerable to the impact of inflation.

Inadequate Investment

Investing an arbitrary amount without aligning it with your specific financial goals won’t be effective. You must determine the exact amount needed for your goals. For instance, if you require Rs 50 lakh for your children’s education in 20 years and invest only Rs 1,000 monthly in an equity mutual fund with a 15% CAGR, you’ll accumulate a total investment value of only Rs 13.29 lakh—far less than your target. To achieve your goal within the specified timeframe, you should invest a more proportional amount, around Rs 3,800 monthly.

In conclusion, avoiding common mistakes in planning for children’s higher education can lead to the desired outcomes. Not only will you keep your investment costs low, but you will also effectively and diligently achieve your financial goals. That is why, it is recommended to consider inflation when determining your required investment amount. This approach will help you manage your finances with greater ease.