TL/DR: Summary of the post
1. Child Plans available and marketed by different companies are not great
2. Create your own child plan
3. Mutual funds can be a great way to create a Child Plan for your Childs future
education or other requirements
4. Learn how to create your personalized child plan
Providing your child the best possible education is the dream of every parent and to make this dream into a reality you would need to start planning now. With increasing costs of education, you need to plan for your Kids education in the same way as you create plans for buying a car, buying a house or making plans for your retirement, one of the key goals a good financial plan should have is to finance your kids education and let me explain the reason why
- While retail inflation is hovering around 3-4 % in India, Inflation in education costs is much higher so education costs will rise faster hence require differential plan
- Large expenses for kids education come together in blocks and are not equally spread out over the life time, for e.g. coaching for competitive exams and graduation costs are distinct blocks.
- Education expenses can vary a lot if you plan to send your kid for international education.
Ok now let’s discuss how we can go about creating a Financial Plan for Child’s education
Steps to Create a Plan for your Child’s education
Understand when the money will be required
This is the most important thing when you set up a financial goal for your Child’s education, basically, there are 4 blocks you would need to take care
- Preliminary education till high school ( this is ongoing linear expense)
- Coaching for engineering/medical/professional courses
- Under grad education ( Engineering/Medicine/Other professional courses)
- Post Grad education( Optional)
2.Understanding how much money will be required for each milestone
This is the most important step for this you need to understand following things
- The current cost of the education milestone: Let’s say if we are looking to plan for undergraduate education for the kid you can use benchmarks for different education streams like engineering at IIT costs around 12 lacs for 4 years similarly MBBS can cost you anything between 10 lacs to 20 lacs for 5.5 years.
- Assessing Future cost ( when your child will require): Next step is to calculate how much would it cost let’s say undergraduate education in future. The way to calculate is as follow
Amount Required in Future = Current Cost *( 1+R)^n Where R = yearly increase in the cost of education;n= number of years to your goal.
So let’s say if your Child is 5 years old and he is going to start her graduation at 18 then take as 13 years this will ensure you have money available up front
R-> also needs to be chosen carefully a lot of financial planners will use current inflation rates but education inflation is much higher in India, I would suggest using 10 % inflation for your calculations.
Let us take an example. Median Fee for an engineering program in India is approximately 10 lacs today.
Median Fee for an engineering program in India: 10 lacs (approx)
Average Inflation in the coming period: 10%
The cost of Engineering Education 15 years down the line : 41 lacs (approx)
3. Creating an investment plan to achieve your goal.
Now that you know the exact amount that you required for education’s expense next steps should be to create an investment plan to achieve the goal. Investment plan should start with what is the returns you can generate from your investment portfolio.
While there are lot of Child plans available in market most of them give sub optimal returns and have high fees/expenses. I would recommend you create a custom plan for your child with long term growth portfolio in mutual funds.
4. Arriving at the monthly saving you require to meet the goal
Now that you know the return you can generate from your portfolio and the final value you require to meet your goal, next step is to calculate periodic investment you need to make now to achieve the goal.
You can use a basic Final value formulae to calculate the same
Investment Per Month (I) = [FV*r] /[(1+r)^n]-1]
Where r = expected rate of return
n= number of months you will make this investment for
Or just use the Bodhik SIP Calculator
Here is a sample of your corpus after 15 years for a monthly investment of Rs 10000 when your returns are 12 %.
Achieving your financial goals requires not just good planning but a disciplined execution. So once you have the right plan in place ensure you meticulously follow on the same.