You might be having headaches sometimes in view of planning the future of your children who are growing up. As parents, it is but human to have expectations about our child’s future — whether it is fulfilling their trivial wishes, education or marriage.
In fact, responsible parents that we are, we strongly believe in the adage ‘education is insurance’, that we are willing to cut down expenses on shopping and outings to save for our child’s education.
But, given the low level of financial awareness in our country and the well-known mis-selling of financial products, it wouldn’t be surprising if many of us fall short of funds. This is where we will encounter our next nightmare. If we dig into our retirement savings (as many of us do), we will dent a blow into our retirement corpus, ruining our standard of living during post-retirement, and possibly end up becoming a financial burden on our children.
Truly, planning early for our kid’s future has become all the more relevant today if we want to give wings to their dreams.
Here are some practical and valuable steps in view of preparing our kids’ education the smart way:
Step 1: Get yourself an insurance
You must insure yourself first. Yes, you heard us right. As a parent, you need to shield yourself before you start investing for your child. Ensure you have adequate health and life insurance coverage, so that your family’s needs are not compromised in your absence.
In case you don’t have one, you should consider taking one immediately. Those who have already bought insurance, ensure you are covered adequately. Less insurance is akin to no insurance.
You may use insurance calculators to find out your insurance needs. This will truly make you and your family worry-free.
Step 2: Open savings account for your child’s education
Open and maintain a separate ‘savings’ bank account’ for your child’s investments and other short-term requirements. From this account, you may begin your child’s investment plans.
With so many goals and different investments made to reach each one of them, it’s easy for things to get jumbled. Therefore, it is important to keep your child’s investments in a separate account even if you are investing in the same mutual fund scheme or investment, for another goal.
This way, you won’t accidentally end up using your kid’s investments. Tracking your kid’s corpus becomes easier by following this step.
Step 3: Look and conceptualize your child’s education
Project now the corpus you will require in the future.
The next step should be to have a unique plan in place for each objective and allocate resources accordingly.
Obviously, projecting for the long-term is never accurate: Your child might end up doing a course requiring lesser/more money than expected, investment returns could be different from the ones assumed, or parents might not invest regularly the required investment every year. However, if you refuse to make a plan and adhere to it, there’s a high probability that you may not achieve your financial goals, unless you get lucky!
You could project your target amount first (inflation-adjusted, that is) and then work backwards to ascertain how much money you need to put aside every month.
For example: At an inflation rate of 6 per cent per annum, an engineering degree that costs Rs 10 lakh (in today’s value) will cost around Rs 21 lakh after 13 years. So, at a growth rate of 15 per cent per annum you need to put aside Rs 4,420 per month for 13 years to reach that goal. In the same manner, a two-year, full-time MBA course that costs around Rs 15 lakh (in today’s value), would cost around Rs 32 lakh after 13 years’ time. Again assuming an interest rate of 15 per cent per annum, you will need to put aside Rs 6,730 per month for 13 years to reach the target amount.
Step 4: Asset allocation
There are a lot of possible means in preparing your child’s education .You may choose from a basket of products to build your child’s education corpus. These include both assured return schemes and market-linked instruments. However, your risk appetite and investment objective should ideally dictate the investments made by you.
You have to also consider the time horizon.
Following is the list of assets (listed priority wise) one can choose from:
Equity:
1. Mutual funds
- Equity Index funds
- Exchange Traded Funds (ETFs)
- Equity-linked saving schemes (ELSS)
- Large-cap equity diversified mutual funds
2. Shares/Stocks:
If you are a risk taker, you may start-off by investing in blue-chip, FMCG and pharmaceutical stocks.
Note of caution: Buy only after thorough research. In case you are new to stock market (or you do not have exposure in this area), you are better off investing through mutual funds as they offer better diversification and expertise.
Step 5: Lastly, but not the least among these 5 steps is to constantly keep evaluating the performance of the various investments (at regular periods like a 3-year or a 5-year period) to find out if they are shaping up as expected, and when the goal is a couple of years away – move the assets to safe debt instruments, so that any falls in the market/economy do not erode the gains you made so far. This will eventually make your children’s future and education truly safe, secure and protected. there is nothing better that will beat the good education of our children and therefore we must see to it that we will follow these 5 steps to the letter as much as possible and religiously.
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In conclusion, preparing for your child’s education in the future is truly a great mark of responsible parenthood. This will surely make you feel secured once your children start studying. As inflation may happen every now and then, your mind is at peace that no matter what, your children education is already in place and you have nothing to worry at all! Happy investing!
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