How do I save for my child’s education?

The one big dilemma that most parents have to face at one point in time or the other is that of ‘how can I save enough to get the best education / degree for my child’. What dilemma, you ask. Of course, you have already figured it all out. You will leave it to your little one to decide what he/she wants to do and then support him/her through. And yes, you have planned your savings to have the funds in place to meet the associated costs.

But let’s take a minute to put things into perspective. Say, your child will be ready for post graduation in 15 years time. Current rates of inflation in the education space are anywhere between 5 to 20 percent. It would be safe enough to assume that the average cost of a post graduation program could be in the vicinity of Rs. 50 lacs for a 2 year resident course in an Indian school of reasonable repute.

Assuming you save an amount every year and manage to get an average annual return of anywhere between 7-10% p.a. you will need to save anywhere between 1.5 lacs to 2 lacs every year for the next 15 years.

What if the cost of education was Rs. 75 lacs – well your required annual investment range just went up to Rs. 2.3 lacs to Rs. 3.0 lacs.

And these amounts can go up exponentially in case you start considering an overseas institution.

Here is a step by step guide to help you plan and save for this important financial goal in your life:

1. Set a Goal Amount or desired corpus: Find out the current costs of various education streams and institutions. Use these current figures to arrive at a ballpark figure that is illustrative of an amount that might be required if your child were to pursue something today. Now apply an inflation figure to this amount to project what you would require at the time of your child’s higher education. Keep in mind the fact that costs of higher education have been rising at an approximate rate of 10-15%. For e.g if your child will be ready for post graduation in 10 years time and the current benchmark figure for post graduation courses is about Rs. 20 lacs, then your goal amount will be Rs. 52 lacs (assuming a rise in cost of 10% per annum for the next 10 years)
2. Determine the number of years you have to achieve this goal: This of course is simple and straight forward. If it is graduation or post graduation of your child that you need to save for, you are likely to need the corpus when your child is between 18 to 22 years old.
3. Determine annual investment required to reach desired corpus: Now that you know your desired corpus and the number of years you have to accumulate this amount, calculate how much you need to save each year. In order to do this you need to assume how much your investments could earn on an average every year. For e.g. if you think 10% is a reasonable assumption for average investment returns for a 10 year period then for accumulating Rs. 52 lacs, you will need to save approximately Rs. 3 lacs each year.
4. Where to invest: You now know the annual amount that you need to invest. The next logical step is to decide which investment options will provide you returns required to accumulate your desired corpus. There are enough and more products across the savings, insurance and investment categories that promise you they can help you meet your financial goals. Each of these products across savings, mutual funds and insurance comes with a set of benefits and charges. One should carefully review and compare all available options to choose what product best meets your requirements at the lowest costs before making a long term investment decision.
5. Cover your risks: Your plans for investing and accumulating funds can get disrupted if you are not around. Most people ignore this risk completely while saving for any future financial goals. It is important to cover this risk through an appropriate insurance cover. A pure term plan to complement your savings is one such option. However, do ensure that the amount of cover is sufficient enough to meet not just your family’s day to day financial needs but also your child’s education funds. Alternately, you could also potentially look at child plans offered by insurance companies. These plans offer a life cover on the parent’s life such that a sum assured is paid out in the event of death of the life insured. The policy, however, typically continues with the insurance company paying all future premiums towards accumulating savings.

The idea should be to start early in planning for your child’s education. Determine the amount that you will need to save for your child depending on his/her age. The earlier you start and higher the time horizon to when you need the money, the higher is the possibility of getting some real capital appreciation on your portfolio in the initial years. Since you have time on your side, you can potentially aim for higher returns through investments in stocks and equity oriented funds during the first few years and gradually adjust the portfolio to risk averse investments for capital conservation.

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