It’s difficult to be a parent. There are simply too many things to handle at the same time. You most likely spend a significant amount of time worrying about your children’s health, homework, and social skills. Then there’s the matter of their future. And you don’t want a lack of finances to prevent them from realising their ambitions. It’s probably best to start saving for your child’s education as early as possible.
Many people view college as a stepping stone to a successful profession. However, it comes at a high cost. For a four-year engineering course, the typical price is Rs 5-Rs15 lakh each year. The typical medical college price ranges from Rs 5 lakh for government institutions to Rs 50 lakh for private universities. An MBA from one of the top IIMs might cost up to Rs 30,00,000.
Furthermore, education at top-ranked overseas colleges might cost up to five times as much, burning a massive hole in your wallet. This does not, however, imply that you should abandon your ambitions to provide the greatest education possible for your children.
What should you put aside for your Kids’ Education?
Before you can figure out how much money you’ll need when the time comes, you must first determine how much money you’ll need. If the current price rise trend continues (as it appears to), the money you’ll need for your child’s education in the next 5, 10, and 15 years might reach Rs. 1 crore, and we’re not even talking about international education!
What is the Rate of Educational Inflation?
The education inflation rate is a metric that measures how rapidly educational prices have grown over time. Education inflation in India is presently around 10-12 percent; more than double that of the economy.
Despite rising inflation and rising educational costs, most parents turn to banks for education loans. This may not appear to be sound advice because you will be responsible for additional interest payments. So, how should you save for your child’s education as a parent? Let’s have a look at it in the next part.
Here’s how to figure out how much money you’ll need to put aside for your child’s education:
Step 1: Establish a Time Frame
When it comes to investing, the most important aspect is time. Determine how long (time horizon) you have to save based on your child’s present age and the age at which they will seek higher education.
Step 2: Find out how much Education Costs
The cost of education nowadays varies depending on where you live, the degree of education you want your child to get, and the sort of institution you want them to attend. Determine if your kid will pursue undergraduate, graduate, or post-graduate degrees in the United States or overseas, as well as whether he or she will attend a public or private college.
Step 3: Take Inflation into Account
Education expenditures are predicted to climb at a quicker rate than other services, according to the government. It’s critical to account for the increased cost as a result of inflation.
Step 4: Determine a Return Rate
It’s critical to choose an appropriate rate of return on your assets. To retain the purchasing power of your money, choose a rate that is higher than the rate of inflation. You may anticipate a better rate of return on an equity mutual fund than on a fixed deposit from your bank, for example. Although the rate of return on a moderately risky mutual fund isn’t fixed, you may make an educated judgement about its long-term performance.
Step 5: Know how much money you’ll need to save each month
Finally, using the estimated rate of return and the ultimate financial objective as a guide, you can determine the precise amount you’ll need to save each month. Calculate how much you’ll need to save each month to reach your goal with an online calculator.
Best Ways to Invest For Your Child’s Education
- Early Birds Get the Best Deals
Starting to save early is one apparent answer. Not only will the user be able to accumulate a bigger quantity of money, but the money will also benefit from compounding. A corpus of Rs 1 crore may appear overwhelming, but it is easy to save this amount over 18 years with a SIP of Rs 9,000 in an equity fund that returns 15%.
- Choose the Right Option
Equity funds should be your recommended investment if you have 15-18 years until your child begins college. The volatility of returns is smoothed out over such a lengthy time period. Your equity allocation might go as high as 75% if you have a high risk appetite. In order to combat the high rate of education inflation, there must be a high level of fairness.
Safer investments, such as PPFs, bank deposits, and tax-free bonds, can make up the remaining 25-30% of the portfolio. If you’re in the 30% tax bracket, income funds are a better option than bank savings. You will only be taxed on the interest when you remove it, rather than every year.
- In the Short Term, Play It Safe
If your time horizon is smaller than five years, you’ll have to rely on fixed income instruments, which are likely to pay a lower rate of return. These, on the other hand, provide assured profits and capital safety. These variables become critical in the short run.
Investing in fixed income securities is quite secure, but don’t invest at random. When investing in debt products, be certain that liquidity will not be a problem.
- Set a Budget for Higher Education
Parents are frequently unclear of how much to set aside for various courses such as medical school, engineering, the arts, science, and commerce. These courses cost between Rs 2.5 lakh and Rs 15 lakh per year. The proper approach is to account for the finest chances you wish to provide for your child, whether they are the top institutions or their job goals. In addition, suppose that over 20% of the tuition costs will be used for additional expenses such as housing in a different location, library fees, extra-curricular activities while studying, equipment purchases, and so on.
- Examine your Portfolio
You should go through your portfolio at least once a year after it’s in place. Check to see whether the amount necessary to achieve the objective has changed. Tuition fees and living costs are two aspects of the education aim. Any of them may climb more quickly than expected. You must determine if your estimated inflation rate of 12% is a reasonable estimate.
Various Ways through which you can save for your Children’s Education
1. Mutual Funds
Mutual funds are a sort of diversified investment that is managed by financial advisers or other investment professionals. Individuals can invest in a wide range of assets, including stocks and bonds, using these vehicles. The nicest thing about investing in mutual funds is that your money is managed by specialists, and you don’t have to come up with investment plans yourself.
2. Sukanya Samridhi Yojana
Sukanya Samriddhi Account (Girl Child Prosperity Account) is a government sponsored savings programme for girls in India. Parents are encouraged to save for their daughters’ future education through this scheme.
SSY is a low-risk investment that pays 7.6% interest. Parents with a 10-year old daughter can enrol in SSY, and the money can be withdrawn when the girl reaches the age of 18.
3. Loans for Education
Savings and investing are not the only ways to fund your child’s education. Your child’s education might also be financed through education loans. Education loans are available for both Indian and international colleges. All of India’s major banks provide them. The interest rates start at 6.85 percent for a 15-year loan.
4. Index Funds
Index funds replicate the composition of financial market indexes such as the Sensex and the Nifty. Their goal is to duplicate a financial market index’s performance. Compared to actively managed funds, index funds have lower fees and levies. Furthermore, index funds have a long-term upward tendency in returns, making them an excellent choice for saving for your child’s education.
Experts have the same viewpoints. If the objective is far off in the future, we propose equities mutual funds as a key asset type. Sukanya Samriddhi Yojana, combined with equity, is recommended for a girl kid.
You should not sacrifice your financial freedom in order to provide a great future for your children. We normally tell our customers not to support their schooling at the expense of their retirement. If your finances can’t cover both ambitions, consider taking out an education loan. It’s vital to remember that having financial independence throughout retirement is crucial.
Top 3 Financial Institutions offering Education Loan
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