Secure your Child's future!
Securing your child’s future is the most important goal for every parent. The cost of education has been increasing every year and pursuing a graduate degree from the top institutes of India can be very expensive. If you plan to pursue your graduate degree overseas, the costs go through the roof. Earlier, most people would fund their child’s education as and when it happened. However, today, one needs to put their head down and plan for it.
Here is a step by step guide to plan and secure your child’s future. You can make use of this interactive calculator to assess your preparedness to fund your child’s education.
A step by step guide to secure your child's future!
Step 1. Estimate the likely expenses
This is the most important step. Your entire plan depends on the accuracy of your estimates. You can start with a few assumptions but over time you need to readjust them based on your situation.
The first question you need to answer is whether you want to send your child abroad. The approximate cost of pursuing a college degree in the USA or UK is about Rs. 50 Lakhs per year. In India, the most expensive education option is a medical degree from a private college (approximately Rs. 25 Lakhs per year). Any other option usually costs lesser than that.
When you start planning, it is unlikely that you would know about the exact course that your child would like to pursue. Since you will only get clarity 2-3 years before your child goes to college, it is advisable to plan for the most expensive option your child could potentially pursue. This will ensure that you will always have adequate money to fund it. As and when you get some clarity about your child’s interests, you can re-adjust the targeted amounts.
The most important factor is to budget for the increase in costs that would happen by the time your child pursues his or her higher eduction. Inflation in education expenses is higher than the overall inflation in the economy.
Step 2. How much have you saved currently towards this goal?
Step 2 is to put together a list of all the investments you have already made towards this goal.
(a) Current Value of Debt Investments: These investments could be in Bank Deposits, PPF, Insurance products, Debt Mutual Funds or any other debt instrument. (b) Current Value of Equity Investments: Some of you might have been saving through Systematic Investment Plans (SIPs) in equity mutual funds or have invested in equities or equity mutual funds.
This gives you an idea of your current savings toward this goal and based on your return assumptions can estimate how much these investments will be worth when your child goes to college . If you are lucky you may have a surplus, or else you may have a shortfall that needs to be bridged using an appropriate savings plan.
3. Determine your asset allocation
You have already determined how much you need (Step 1) and how much you already have (Step 2) to meet the expenses related to your child’s education. The savings gap has to be filled by saving and investing appropriately. You now need to reflect on how much risk you can tolerate and decide the appropriate mix of assets (asset allocation).
Since investment returns are unpredictable, it is important to make some assumptions on the likely returns in the future. We would encourage you to use conservative estimates while budgeting for future returns.
Basis the asset allocation and the estimated returns, you can arrive at a potential return that you will use to develop a savings plan. As you can see, a higher allocation to equity means a higher potential return but also a greater level of risk. Most investment plans fail due to a higher level of skew towards debt or equity. Getting the right balance is key.
Step 4. Set up your savings plan to bridge the gaps
Very few investors are blessed with sufficient funds to meet their child’s college education costs. If you are one of those lucky ones, you just need to review and readjust your portfolio periodically.
Conversely, if you have a savings gap, you need to create a plan with the right blend of products to help you bridge this gap and eventually meet your target savings amount.
Next Steps
I hope this step by step plan and the calculator helped you gain clarity on how to go about funding your child’s education.
At Ortium, we are committed to help individuals meet their Financial Goals and would be delighted to put together a savings plan for you that ensures your child receives his or her dream education without you having to worry about funding it. Please feel free to write to us and schedule a discussion.
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