This article will share a clear step-by-step guide that will help you start saving for your kids’ education in a structured way & also track the progress.
Step #1: Decide on time horizon & cost of education
Regarding the time, you need to keep in mind that the money requirement will start to arise as your kid moves past 9th standard. This will help pay for specialized coaching that she may require from the perspective of clearing competitive exams. Also, the money requirement will span across years & will not arise in a single year.
The best approach regarding cost estimation is to consult parents whose kids are actually pursuing higher education. They are in the best position to give you a holistic perspective. Education inflation in India ranges between 12-15% in India. Hence, you need to consider that to arrive at the future cost (as on the year you need the money) of this financial goal. You can arrive at this amount using the +FV function in MS excel.
Step #2: Tag your existing assets to this goal & arrive at the monthly saving amount
Once you’ve done the tagging, you can arrive at the shortfall. This is the total money you need to plan & invest for. But how to find how much I need to invest per month in bridging this gap over so many years? To find that, you can simply use the +PMT function in MS excel.
Step #3: Decide on the suitable Investments
In our view, you can stick to low-cost & straightforward products like mutual funds & PPF. You also need to have an asset allocation that means a balanced allocation between equity & fixed-income investments.
You can consider equity mutual funds & for fixed income portion for equity portion. You can choose debt mutual funds (or fixed deposit, if you fall in lower tax brackets) & PPF. Finalize 2-3 schemes from each category having a decent performance track record.
Important: Do not fall for child insurance plans – they are a clever marketing gimmick to profit from the parents’ emotions & anxiety for their child’s education.
Step #4: Start Investing:
Try to keep the date of SIP in the first week of the month. This will help in two ways as follows:
- You put your investments on “autopilot”. This removes the mind’s resistance to investing manually.
- You become clear on how much money is left after investing. This will help you manage your spending in a better way.
Step #5: Do a “performance review”:
- Check the asset allocation & see if it has deviated from your ideal allocation. If yes, re-balance by buying/selling investments, as applicable.
- Check the performance of the schemes you’ve invested in. If there are any sharp drops in performance or events like a change in fund manager, evaluate whether you should continue in the scheme or not.
- If you’ve got a pay raise during the year, check if you can increase the SIP amount.
- As you reach closer to the goal, start moving all your money to a fixed income. Try that 3 years before the goal due date; your entire investment is in fixed income.
Some additional tips to help you plan for your child’s education:
- Don’t forget to get adequately insured by purchasing life, personal accident & Mediclaim insurance.
- Have a contingency fund of at least 6 months. This will help you stay on course despite any financial emergencies.
- The above calculations require some dedicated time & working knowledge of MS Excel. If this proves too overwhelming, don’t hesitate to consult a financial planner.
- Though a child’s education is a critical goal, do not sacrifice your retirement for this goal. As a last resort, a child’s education can be funded with a retirement loan, not your retirement!