Financial planning to secure your child's education goals

Any parent responsible for the financial needs of their child’s education, planning in advance is a crucial success factor to match aspirations with needs.

I often say we must begin with ‘wants’ and ‘needs’ simply because, while as parents ‘our wants’ may be a dream wish list, we must realistically focus on the ‘needs’ as a matter of priority. The ‘need’ therefore is really identifying a ‘good’ school that is safe, secure, academically sound, and, importantly, has a fee structure that is affordable in both good times and bad times. I say this as a way of mitigating risks associated with taking on a school, whose financial expectations are way beyond your current means irrespective of its quality.

Simply put, your child may aspire to go to Harvard, but it might take every ounce of your wealth to be able to fund that. It could also mean compromising on other aspects of life and undergoing the stress of taking loans, etc. Though opting for a lower ranked institute can be a solution, as fortunately India offers plenty of options to choose from, one should prepare for the best.

Saving for one’s child’s education is the most important financial goal of any individual. We all know that the cost of education is on the rise in India and globally, and when it comes to our child’s education we would never cut corners as it involves an emotional setback unlike controlling other expenditures like taking a vacation, buying a car, a mobile phone, etc.

It is recommend that one ought to start the process well before the baby is born by researching and identifying schools of choice — so if you know the costs involved at pre-school level, at primary school, at high school and higher education in terms of a 13-15 year horizon, it will be easy to plan investments. Your friendly neighbourhood investment expert would be a great resource person to lean on who will advise you on different scenarios and most banks today have wealth managers who would be able to plan strategies as per your need. Look for schools that have a monthly paying option if possible, so that it makes it easier on your outflows for the year. All said, the crux of the matter remains planning as early as possible for your child’s education.

Starting early to save for your child’s education allows you a longer time in hand, which means a bigger  impact of compounding on the corpus you wish to build. Let us understand the power of compounding through a simple example. An investment of Rs 1 lakh today would grow to Rs 1.4 lakh in five years at a compounding rate of 7%.

If the holding period is increased to 15 years, the corpus you will be able to build would be Rs 2.76 lakh. Now, if the investment compounds at a rate of 15% for 15 years, the amount you will be saving is a staggering Rs 8.14 lakh. Such is the power of compounding and it brings us to an important aspect of saving.

Just saving is not enough as you have to choose your asset classes wisely. There are two major asset classes available for investments, namely, equity and debt. While a debt instrument is simpler and predictable in terms of the returns involved, the returns over a long period of time are lower than equities. For instance, a fixed deposit could fetch you a return of just over 7% today.

On the other hand, equities have a higher compounding power. Any financial advisor would tell you equities are risky in the short-term, but as the holding period increases to over, say five years, the risk from equities reduces. The best way to hold equity investments is through mutual funds and there are products designed specifically for building a corpus for one’s child’s education.

Periodic reviews — six monthly audits or yearly audits of your expectations, experiences and future plans vis-a-vis your cash flows will be an efficient and planned mechanism for you to manage your child’s educational needs especially finances. Also remember, when you invest for your child’s future, you are goal-oriented and you must be absolutely 100% disciplined as to use the money saved only for the intended purpose. It is easy to get tempted and spend the money on other personal or social requirements and this should be avoided at any cost.

A strong educational foundation is critical for the future of the child and with a bit of structured planning, you will surely be able to provide the right start for your little one. As the famous quote of Chanakya goes, “Education is the best friend. An educated person is respected everywhere. Education beats the beauty and the youth”, quality education is the best gift you can give to your child. So prepare for the best!

(The writer is Educationist and Co-Founder, KA EduAssociates, an educational management services company )