How to plan for your children’s education?

Children’s education is a top priority and a significant milestone for most Indian families. However, in addition to the increasingly competitive landscape, the cost of education can be a serious hurdle. Education inflation in India is estimated at 8%-10% per annum, which is almost double that of retail inflation.

A standard undergraduate degree in India that costs Rs 10 lakh today on average, will set you back by more than double that amount a decade from now. The financial challenges compound further if you consider Ivy League institutions or international programs. 

Education planning is therefore imperative to ensure that your child’s dreams and aspirations are fulfilled and set on the path to success. Read on to find out how you can strategize for your child’s education plan.

Estimate the actual cost

To get a ballpark figure, you will have to consider many variables – tuition fees, living and travelling expenses, utilities, healthcare, and other sundry costs. You will also have to account for changes in currency value exchange rates for international courses. To be safe, add another 10% to your estimated estimate. Adjust this ballpark figure for education inflation at 8% - 10% each year, depending on the time till you need the funds.

Set a time horizon for goal-based investing

Investing for your child’s education goals is time-sensitive as it is based on your child’s readiness to pursue their graduate or post-graduate program. Your savings plan and investment choices will depend on how much time you have. Once you know the required corpus, you will have to work backwards to understand how much you need to save and invest every month to achieve the desired corpus. Naturally, the earlier you begin, the more you can save and take advantage of a higher rate of compound interest on the investment. 

Assess your existing financial health

Before you get on an investment plan, you must take stock of all existing assets and liabilities. You may already have some resources or investments that could be diverted towards the education fund, giving a much-needed head start. Conversely, if you have other fixed liabilities like a home loan or car loan, you must account for the monthly outlay first and then figure out how much you can save. A budgeting exercise can help you find avenues to cut down on non-discretionary expenses and fruitfully utilize the funds towards your child’s education.

Make smart investment choices

Saving for children’s education requires long-term planning, and it is crucial to devise a separate portfolio for the goal. The asset allocation strategy will depend on your risk appetite and time to divestment. If the investment horizon is more than five years away, equity mutual funds offer an excellent opportunity to invest via a systematic investment plan (SIP) and earn higher returns.

As you approach your goal, apply a rebalancing strategy wherein you gradually book profits and move the portfolio towards fixed income investments to protect its value from market volatility and uncertain economic conditions.

Adopt a flexible investment plan

Avoid parking your funds in rigid assets such as children’s education insurance plans or other long-term close-ended small savings schemes. Flexible investments without lock-ins or pre-determined payouts make it possible to pivot your investment strategy in case of any economic or investment environment changes. They also allow you to continue with your asset allocation and rebalancing strategy. More importantly, if you need to liquidate investments at short notice, your investments should offer that flexibility.

Take a step-up approach to investing

A step-up approach to investing is nothing but increasing your allocation towards the goal to correspond with your increase in income as the years go by. This strategy not only allows you to invest more and help gain from quicker compounding but also makes it easier to counter inflation and other unexpected financial hurdles effectively. Likewise, if you come by any spare resources or surplus funds (say by bonus, inheritance, or windfall gain), you can use a good part of it to make a lump sum investment towards the college fund.

Get adequate insurance for the family

Your dream of giving your child the best education can be severely impeded in the event of your untimely demise or if you get diagnosed with a life-threatening disease or meet with an accident that hinders your ability to earn. It is essential that you purchase the right amount of insurance after accounting for all your family’s needs, including coverage for living expenses and outstanding liabilities. Adequate life insurance acts as a back-up plan that ensures you can also fulfil your family’s shared goals (such as your child’s education) through the insurance payout.

Have an emergency fund in place

An emergency fund can serve various purposes. Primarily, it acts as a deterrent against dipping into the education corpus to take care of other financial emergencies. On the other hand, the emergency savings plan can be a savior if you need quick funds related to your child or their education. For instance, during the peak of the pandemic, many students abroad had to unexpectedly rush back home after their universities shut down (often for months) in an attempt to control the spread of COVID-19. In such a scenario, an emergency fund can provide the much-needed liquidity to travel back and forth.

Leverage an Education Loan

Given how expensive education can get, despite your best efforts and thorough calculations, your savings may not match what may be required for your child’s degree. Here, an education loan can be useful to bridge the gap. IDFC FIRST Bank offers swift and easy collateral-free education loans so that your child can study at their dream college. 

These loans are available for over 18,000 different domestic and international courses, ensuring that your child gets the best opportunity in their field of education. More importantly, IDFC FIRST Bank’s education loan schemes come at attractive interest rates and with customized repayment options. 

Education is the best gift you can give your children. Be sure to plan today for their bright future!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.