Child Education Plan: How to Save & Invest
Child’s needs are the top priority for most Indian parents
In January 2020, PGIM India Mutual Fund, in partnership with Nielsen India, did the Retirement Readiness Survey 2020. As per the survey results, retirement planning was one of the last priorities of Indians. On the other hand, the top two priorities of Indians were providing for their child’s needs and the child’s financial security. In this article, we will discuss how to save and invest for a child education plan.
For any parent, their child’s needs take precedence over their needs. These include providing for the child’s education, marriage, and any other future needs of the child. After providing for the child’s needs, according to the survey results, the child’s financial security is the second most important priority for Indians. The best way any parent can provide financial security to their child is by giving them good education and technical skills using which the child can build a successful career for themselves.
Financial priorities of Indians
As per the Retirement Readiness Survey 2020 results, the financial priorities of Indians included:
- Child’s needs: For any parent, providing for their child's future including education and marriage is the biggest priority. As per the survey results, this need is majorly driven by consumers in Tier I cities having the lower monthly income (20-50k)
- Child’s security: As per the survey results, financial security for children is the second-biggest priority. This need is driven by consumers in Tier I cities
- Security of spouse
- After providing for the child’s needs, providing financial security for the spouse is the next priority for Indians.
- Medical emergencies: Once the child’s and spouse’s financial security are taken care of, Indians shift their focus towards financial security for medical emergencies/expenses. This need is driven by consumers in Tier I cities with lower monthly income (20-50k)
- Being fit: During the pandemic, Indians have realised that being physically and mentally fit is important. This need is driven by consumers in Tier I cities
- Lead a peaceful life: Individuals prefer to lead a peaceful life without any stress or burden. This need is driven by consumers in Metros having a lower monthly income (20-50k)
- Improving lifestyle: As individuals grow in their careers, they aim to improve the standard of living/lifestyle. This need is driven by consumers in Tier I cities having the lower monthly income (20-50k)
- Retirement: As per the survey results, the last financial priority for Indians is to plan for life after retirement. This need is driven by consumers in Metros and New Consumer Classification Systems (NCCS) A consumers
(Source: PGIM India Mutual Fund Retirement Readiness Survey 2020)
As can be seen from the above survey results, a child’s needs are the top priority for Indian parents. These needs include providing for a child’s future, education, marriage, etc. In this article, we will focus on how parents can provide for their child’s higher education.
Why should you plan for your child’s higher education?
In the last ten years, the cost of higher education has multiplied by 2.5-4 times for various courses. Therefore, it will not be possible for parents to fund their child’s higher education from their current income. Hence, they must plan.
Table: Increase in education cost for various courses
|Name of the course||Fees in 2009 (in Rs.)||Fees in 2019 (in Rs.)||Yearly growth in last ten years (%)|
|B. Tech||3.6 lakhs||10 lakhs||10%|
|MBA||5 lakhs||19 lakhs||12%|
|M.B.B.S (in private colleges||10 lakhs||25 lakhs||10%|
As shown in the above table, education costs increase by 10-12% p.a. Hence, parents need to plan accordingly.
Planning for child’s higher education
Let us take an example to understand how an individual should plan their child’s higher education systematically. Karan’s daughter Sheetal is three months old. He wants to start planning for his daughter’s higher education right away. Karan wants Sheetal to decide which course she would like to go for when she grows up.
Karan has done some research and understands that as of today, a post-graduation course in India is likely to cost around Rs. Twenty-five lakhs on average. A post-graduation course abroad is expected to cost Rs. Fifty lakhs on average.
Calculate the future cost of education
Karan expects education costs to go up by around 10% every year. Karan will need the money after 20 years when Sheetal is ready to go for her post-graduation. So, a course that costs Rs. Twenty-five lakhs today will cost a whopping Rs. 1.68 crores after 20 years, if education inflation goes up by 10% every year.
Chart 1: Increase in education cost
The above chart shows how the current education cost of Rs. 25 lakhs will balloon to Rs. 1.68 crores in 20 years, if education inflation is 10% p.a.
Similarly, a post-graduation course abroad that costs Rs. Fifty lakhs today will cost Rs. 3.36 crores after 20 years if education inflation is 10% p.a.
Building the education fund
Karan has 20 years to accumulate Rs. 1.68 crores for Sheetal’s higher education. He will invest in mutual fund systematic investment plans (SIPs) and expect a 12 compounded annual growth rate (CAGR).
Karan will have to invest Rs. 17,368/month or Rs. 2,08,414/year for the next 20 years to accumulate Rs. 1.68 crores to accomplish his financial goal.
Chart 2: Building the education fund
As shown in the above chart, if Karan’s annual investment of Rs. 2,08,414 grows at the CAGR of 12%; then, he will accumulate his education fund of Rs. 1.68 crores in 20 years.
Similarly, if Sheetal plans to go abroad for her higher education, Karan will have to invest Rs. 4,16,828/year or Rs. 34,735/month to accumulate Rs. 3.36 crores.
Make a systematic goal plan
Before Karan starts investing in Sheetal’s higher education, he will have to make a proper goal plan that involves the following:
- Risk profiling: Karan will have to do his risk assessment to understand whether he has an aggressive, moderate, or low-risk appetite.
- Asset allocation: According to his risk appetite, asset allocation will have a mix of equity mutual funds, debt mutual funds, gold mutual funds, international equity funds, etc., in varying proportions.
- Implementation of the goal plan: Once risk profiling and asset allocation are finalised, Karan can start investing accordingly.
- Regular review of goal plan: Karan will have to review the goal plan once every 6-12 months to ensure his investments perform as expected. If some investment is not performing as expected, then he may make suitable changes. The review will have to be done regularly till the financial goal is accomplished.
Things to take care of before investing
Before Karan starts investing for Sheetal’s higher education or any other financial goal like retirement planning, he should make sure certain things are in place. These include:
- Emergency fund: Karan should have an emergency fund to take care of unplanned and unexpected financial emergencies. The fund should have an amount equivalent to 3-6 months of income.
- Life insurance: Karan should buy a term insurance plan. It will take care of his financial liabilities (home loan and any other loans) and financial responsibilities (child’s higher education, spouse’s retirement, etc.) in his absence.
- Health insurance: Karan should buy a family floater health insurance that will cover all the family members.
Partner with the Glide Invest App
For the above goals, like building an education fund or emergency fund, you can partner with the Glide Invest App. You can start your financial planning journey and systematically invest towards your financial goals with the Glide Invest App. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved.