Five steps to build a solid child education plan

By: | Published: August 6, 2018 1:22 AM

Check out the five steps to building a solid child education plan.

When your child is ready to go to college, you will be ready with the right amount of money and won’t be awed by the high costs of education. (llustration: Shyam)

Providing children the ideal opportunity for learning and development is foremost among any parent’s goals. Therefore, it’s necessary to carefully plan a children’s education fund. When your child is ready to go to college, you will be ready with the right amount of money and won’t be awed by the high costs of education. Here are some simple steps to take while planning your child’s education fund.

Waste no time
Planning for your child’s education is a long-term financial goal. The best time to start planning for your child’s future needs is when he or she is born. Assuming your child will go to college at the age of 18, you will have nearly two decades to create the right-sized fund for your child’s need. The effect of compounded growth will allow you to achieve this goal with small, monthly contributions.

Plan for inflation
With inflation, higher education becomes more expensive each passing year. In 2018, a premier business school raised the fees for its flagship two-year course to Rs 21 lakh. In 2008, the same course cost Rs 6 lakh. Thus the cost has grown at an average rate of about 13%. Assuming a similar inflation rate, the same course may cost Rs 69 lakh in 2028. While calculating your child’s education funding needs, it is important to assess the future costs of education.

Avoid low returns investments
Children’s education is typically a long-term goal, and as seen from the above example, there is high cost inflation here as well. Therefore, you should invest through instruments that provide inflation-beating returns. A long investment tenure allows you to take moderate levels of risk, which can potentially produce high long-term returns.

For example, the 10-year returns on equity mutual funds is 11.80%, well higher than the rate of inflation, as well as returns from small savings schemes such as PPF. With a long-term investment plan through high-reward instruments, you can recover from periodic market fluctuations and emerge with the desired corpus in the optimum time-frame.

So, if you invest for Rs 50 lakh in 15 years, you can invest either Rs 10,000 a month with a returns expectation of 12%, or Rs 15,500 with a returns expectation of 7%. The first option is easier on your pocket.

Start small and step up
It’s easy to be daunted by the astronomical money requirements. However, while investing towards any goal, you should implement the concept of stepping up. For example, you earn Rs 50,000 today and save Rs 10,000 per month. Next year, if your income increases by 10% to Rs 55,000, you should increase your savings by 10% to Rs 11,000. Stepping up your investments each year allows you to start with baby steps when your income is small, to bigger steps as your income grows.

Insure yourself
Life insurance should be seen as a protection cover for your family first, though it is also popularly used as an investment. In case of your untimely demise, your life cover should help replace your income, keep your family afloat financially, and help your children achieve their life goals. Your life cover should be at least 10-20 times your current annual income. With a term insurance plan, you can achieve this coverage requirement and ensure financial safety for your family even in death.

The writer is CEO, BankBazaar.com

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition