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In 2016, IITs raised fees from ₹90,000 to ₹2 lakh per year. With education costs rising 10% annually, parents should build an education fund. Expert Tushar Bopche offers an 8-step plan.
Child Education Planning
In 2016, IITs increased their fees from ₹90,000 to ₹2 lakh per year, that means the cost more than doubled for students and parents. In general, education cost, for both schools and colleges, rise by 10% a year.
If the rising cost is one reality, another wonderful truth is that every parent wants to give the best education to their child. To balance these two realities, parents need to build a dedicated education corpus and be financially ready for their child’s needs.
Expert shares a step-by-step approach to help you secure your child’s educational future. All you need to do is find the answers to the questions:
Step 1: What is Your Time Horizon?
How much time do you have before your child embarks on higher education. This timeline will be a major factor while devising an investment strategy. If your child is currently 3 years old, for example, and is expected to start college at 18, you have a 15-year investment horizon. In these 15 years, you will have school expenditures, coaching classes, and other expenses as well. Factor those too. Create a complete education journey for your child starting now.
Step 2: What Will Be the Future Cost of Education?
As mentioned before the average education inflation is 10%, it far out paces the interest rates offered by traditional investment options. It is crucial to project what expenses will look like when your child reaches college age. If BTech from IITs costs ₹12 lakh today, in 15 years, at a 10% annual inflation rate, the cost would rise to approximately ₹30 lakh. This estimation gives you the goal you need to achieve.
Step 3: What is Your Current Financial Situation?
Do this simple exercise and evaluate your existing savings, investments, and assets that you’ve already dedicated for your child’s education. This amount will tell you how much more you need to save to meet the goal. Make it absolutely certain that you do not use these funds for any other reason.
Step 4: What Are Your Specific Financial Goals?
Now that you know how much funds you currently have, how much more you need, and how much time is in your hand, you can set your financial goals to meet your child’s education requirements. Include your child in the discussion and define what kind of education are you envisioning, whether it’s a professional course in India or studying abroad. Be specific and add every detail. The education journey that you created before will help you cover all the aspects.
Step 5: Have You Chosen the Right Investment Instruments?
A single stream of investment never gives steady returns because of the volatility of the markets. A diversified portfolio with a mix of debt and equity balances the gains in the long-term. Select your investment avenues that justify with your time horizon and risk appetite. If your time horizon is long, go invest more in market-based returns such as mutual funds as they offer higher returns. Debt instruments such as fixed deposit are considered better for shorter durations. It is advisable to consult your financial advisor to create a portfolio best suited to meet your goals.
Step 6: What Your Monthly Investment Requirements Will Be?
Now that the portfolio is ready, the next step is to determine how much you need to invest regularly to meet your future education cost goal. The best rule of thumb is to invest before you spend. Set aside the amount you need to invest at the start of the month, then go on about spending on your monthly expenditure.
Step 7: Are You and Your Child Protected from the Uncertainties of Life?
Life is uncertain. Always have an insurance so that the goal you have set for your child are secured in case of something unforeseeable. Unit Linked Insurance Plans and Child Education plans are the best options for you as they ensure the death benefits are intact and the premiums are paid.
Step 8: Do You Regularly Review and Adjust Your Plan?
This is a basic one. With the help of your financial advisor, revisit your financial plans periodically and adjust for changes in income, expenses, and educational aspirations. If the cost of education rise faster than anticipated, you may need to increase your investment amounts. Similarly, if your income increase, be sure to invest more.
The more time you have the better returns you will reap. Delaying the investment will only increase the financial burden. I cannot stress it enough how important early investment is. But, if you do not have a longer time horizon or are in the immediate need of funds, education loan is your best friend. With attractive interest rates, moratorium period and longer duration for loan repayment, an education loan ensures that your child does not miss out on the best opportunities in life.
This is authored by Tushar Bopche, co-founder of invest4Edu.
The views expressed in this article are those of the author and do not represent the stand of this publication.