Rising costs of higher education in India and abroad have added further complications in this quest. So, having a well designed financial plan in place is essential to ensure that parents can create a sufficiently large corpus. Read on to know some smart ways in which parents can plan for their children’s higher education costs without having to place undue stress on their finances.
One of the key financial goals that many parents seek to achieve is to save enough to meet the needs of their children’s higher education. However, there are various uncertainties when one attempts to reach such a long-term goal, so, its easy to feel overwhelmed. In case you are a parent who is attempting to plan your child’s higher education, read on the learn about some smart ways parents can prepare for higher education costs.
Estimate Future Education Costs
The first step you should consider as a parent preparing for your child’s future education costs is to create as accurate an estimate as possible. To do this correctly, you have to consider not just the cost of higher education today but also what it will cost in the future due to the impact of inflation.
As per various estimates, the cost of higher education has risen by around 10% to 15% annually in the past decade. This trend is expected to continue in the coming years as well. So, assuming 10% annual inflation rate, an education course that costs ₹15 lakh today, is expected to cost around ₹39 lakh in 10 years and around ₹63 lakh in 15 years.You can easily use a free online inflation calculator to determine the expected future cost of various courses based on current fees and the expected rate of inflation.
Why is it Important: Setting yourself a clear goal is the crucial first step in estimating how large a corpus you will need to save for your child’s higher education.This in turn acts as the key ingredient for creating an investment strategy that can help you achieve the goal.
Key Considerations: Always plan for a buffer amount and be realistic when setting yourself a financial goal. If you set yourself a goal that is not line with your current financial situation, there is little chance that you will be successful in reaching it.
Create an Emergency Fund
Parents should consider creating an emergency fund before they start making any investments towards creating a corpus to fund their child’s higher education.An emergency fund is a highly liquid corpus designed primarily to used in a financial emergency. Common reasons to use an emergency fund may include job loss, emergency repair of car or home, a sudden need of funds for unexpected medical treatment/hospitalisation, etc. The size of an emergency corpus should ideally be sufficient to cover living expenses for a period of 6 months to 9 months.
Why is It Important: Creating a corpus to fund your child’s education requires investments that have to potential to generate inflation-beating long-term returns. An emergency fund can help ensure that your long-term investments are not withdrawn prematurely so that their wealth creation potential remains intact.
Key Consideration: The goal of an emergency fund is not wealth creation. So, the focus is to maintain the funds in potentially low risk and high liquidity investment options. Some investment options that can be used for maintaining emergency funds include savings accounts, liquid funds, ultra short duration funds, etc.
Start Investing as Early as Possible
When you are seeking to achieve a long term goal, nothing beats an early start. An early start ensures that your investments have more time to grow by leveraging the power of compounding. What’s more, you don’t even need to start with a large amount. Yet, even a short delay of few years can impact the size of the corpus you could create.
Let’s see the impact of a delay with an example. Assume you make a monthly investment of ₹10,000 in an investment plan that gives 12% annual returns over a 15 year investment period. This way you would invest a total of ₹18 lakh and the size of the total corpus at maturity would be about ₹47.59 lakh.
But what if you waited 5 years and instead invested ₹20,000 per month for 10 years and received the same 12% p.a. return on your investment? In this case your total investment would be ₹24 lakh and your corpus at maturity will be around ₹44.81 lakh. So even though you actually invested more in the second case, you would end up with a smaller corpus just because you started late.
Why is it Important: In case of long-term investment, time in the market is far more important than timing the market. Even an investment that seems too small to start with can help you create a significantly large corpus given enough time.
Key Considerations: Ensure that you make investments in a disciplined fashion and in a systematic manner. Without financial discipline, you would never be able invest consistently and this can have an adverse impact on the performance of your long-term investments.Automating your investments is an easy way to ensure long term financial discipline.
Choose Your Investments Wisely
Parents currently have a wide range of investment options at their disposal, which they can choose from. However, for long-term goals such as financing your child’s higher education, there are few alternatives to equity investments. Equities whether in the form of direct stock investments, equity mutual funds or equity-focused child plans,are unmatched in their ability to provide high inflation-beating returns in the long-term.
Plus in the case of child plans offered by life insurance companies, the life cover benefit extended to the parent of the child. This adds a layer of protection that ensures that the plan beneficiary receives an assured lump-sum payout in the case of the parent’s demise. However,in the case of these market-linked investments, returns are not guaranteed and volatility may be high in the short-term.
Conservative individuals, however, might opt to invest in various fixed return instruments to save for their child’s higher education, Examples include Sukanya Samriddhi Account,fixed deposits,recurring deposits,PPF, etc.These investments offer fixed predictable returns irrespective of market conditions and tend to be significantly less volatile than equities in the short-term. However, this higher safety often comes at the cost of relatively lower long-term returns compared to equities.
Why is It Important: Your choice of investment plan should help you reach your personal goal with ease. If you have over a decade to save for your child’s higher education, equities offer an unmatched opportunity for long-term wealth creation. On the other hand, if the investment tenure is relatively short, a debt-oriented options that offers assured returns may be preferable.
Key Considerations: Diversification of your investment portfolio is crucial. This can potentially help optimise returns and reduce overall risk in your portfolio. By spreading your money across multiple investment options you are decreasing your portfolio’s reliance on the performance of any specific investment.
Ensure that your child’s education needs are fulfilled by purchasing the Ageas Federal Life Insurance Young Star Plan.To know more about this child education plan, schedule a free call with an Ageas Federal Advisor.
Check the Performance of Your Portfolio Periodically
After making your initial investment choices, you cannot let your portfolio run on autopilot. You need to review the performance of your investments periodically and make adjustments as and when necessary. This periodic portfolio rebalancing is designed to ensure that you stay on track to reach your financial goal.
Why is it Important: Periodically checking your portfolio’s performance is necessary to determine which investments are doing well and which need to replaced with better performers. By identifying these you can determine which investments to hold, which you need to watch closely and which ones should be replaced.
Key Considerations: Portfolio performance checks should be done at least once a year but preferably no more than every 6 months. If you check your portfolio’s performance too frequently, you may end up making changes to your portfolio too frequently. This can adversely impact the wealth creation capability of your long-term investments.
Create an Exit Plan
As you get closer to your goal, it is necessary to start shifting your equity investments into potentially less volatile debt-oriented investments. This way, you can ensure that the wealth you have created over time gets preserved over the long-term. This will also help reduce the overall risk in your investment portfolio so that you can stay on track to create an adequately large corpus to fund your child’s higher education.
Why is it important: A well formulated exit plan is almost as essential as a well-designed investment plan. While the latter can help you create wealth over the long-term, the former helps preserve the wealth you have created from market fluctuations. This ensures that that you are able to deploy the funds as and when required.
Key Considerations: An exit plan should not involve a sudden shift in your portfolio, instead it should be done gradually. Exiting from current investments in a systematic manner ensures that the benefits of compounding from your long-term investments is maximised.Simultaneously, the potential short-term volatility risk in your investments portfolio.
Plan What to Do In case You Fall Short
Even the best laid and implemented plans might not succeed, such is the unpredictability of life. In such a situation, it might be prudent to consider taking on debt such as an education loan, loan against property, gold loan, etc. These borrowings can augment your savings so that you can ensure that financial constraints do not impact your child’s education choices.
Why is it important: Every plan should have a backup and parents need to be mentally prepared to switch the alternative as and when required. While not the ideal solution, taking on a bit of debt to fund your child’s higher education is definitely a better option than having to say no to your child’s dream career.
Key Considerations: Education loan might seem like the obvious choice to fund your child’s higher education, if you have been unable to save. However,do consider opting for alternatives such as loan against property and gold loans, if you have the assets to use as collateral. These secured loans often feature a lower interest rate that can reduce the cost of borrowing. This can make it easier to pay off the debt.
Concluding Thoughts
Parents in India place significant importance on their child’s higher education. That’s why saving for their children’s higher education is among the most important financial goals that every parent plans for. But parents should also remember that their child’s dream should not come at the cost of the needs of the parents themselves. Creating a corpus for higher education of the child cannot supersede the need to pursue other key financial goals such as savings enough for a financially secure retirement.
