Education does not come cheap and quality education for the kids will severely dent a parent savings. Private schools, professional degrees, tuitions, extracurricular activities, hostel fees, etc., will cost you an arm and a leg or even more. No parent would ever want to compromise on the quality of education for their child. Fortunately, with sound financial planning, no parent has to. Depending on the investment horizon, many of options are available to plan for your child education needs efficiently.

As parents you wish the best for your children. This among other facilities and amenities includes providing world-class education so that they can achieve their career goals. This is easier said than done given the challenges and competition in the field of education today.

Apart from the challenges of education, which is for the child to grapple with, parents have their own hurdles to overcome i.e. sharply rising cost of education. As a parent if you are not adequately geared to meet this particular challenge your child could well miss the bus on a solid degree regardless of his/her skill and aptitude.

Consider this – a 2-year MBA course at a premier management institution today would cost you nearly Rs 15 lakhs. At an inflation of rate of 10% for education, this amount would bloat to Rs 100 Lakhs after 20 years when your child will sign up for the MBA course.

Therefore, it is 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 will not 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 through SIP mode in Mutual Funds.

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. 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.

In recent years, Education expenses in India have been inflating at a higher than average rate. The average 5-year annualized inflation for the tuition fees for an MBA course stands at 10%, Engineering courses at 9%, and MBBS at 12%. And what’s more, tuition fees are not the only expenses one needs to save for – there’s also rent for hostel or PG accommodation, books, study materials and what not!

To make matters worse, most of us are clueless about the right way to save for our children’s education. We continue to blindly put away money into “Child Plans” that are essentially Life Insurance policies. Many of these plans provide poor returns that do not even outpace inflation!

What’s the “right way” to save for your child’s education?

Do The Math

Set clear goals in terms of target dates and amounts. Don’t forget to consider inflation!

Start Early

When’s the best time to start saving? The day your child is born! The earlier you start, the more you’ll benefit from compounding

Go Aggressive

You are got time on your side. Go for high risk, high return investments such as SIPs in equity oriented funds. No FD’s, please!

Avoid Insurance

A simple term plan is all you need to protect your loved ones. Do not get trapped into one of those poor performing, opaque “Child Plans”!

Child education planning: points to consider

Quality Matters

A Georgetown University Report estimates that quality of education could impact lifetime earnings of an individual by 20-50%

Loans = A Bad Idea

Either you will be paying EMIs when you should be saving for your retirement, or your child will get off to a debt-ridden start. Both are bad situations to be in.

Mutual Fund Sips Work Best

Mutual Funds can help your savings outpace inflation. Their flexibility will allow you to gradually de-risk as you approach your goal.