Free education and scholarships were once the norms across the globe. However, that era has long gone as it takes a substantial amount of funds to get a child educated these days. This is why saving up for your child’s higher education must now be one of the most crucial elements of personal financial planning. Saving funds for higher education requires a careful allocation of sufficient money over many years. If you save for a minimum of 7-8 years, you may be able to save enough considering constantly rising inflation.
So, how can you begin saving, what do you need to estimate the savings required for your child’s education, and how can you plan to accumulate sufficient funds?
Here, we will share some of the best saving strategies that you can adopt for your child’s education and ensure a brighter future for him/her.
1. Estimate the future education cost
We all know that education costs have sky-rocketed over the last few decades, both, in India and foreign countries. As more parents and children demand high-quality education, there is increasing competition due to limited seat availability in most premier institutes like IITs and IIMs.
As an example, a 2-year MBA program at a top IIM may cost somewhere around Rs.20-25 lakhs versus 10 years ago, the cost would have been only Rs. 4-5 lakhs. This rise is not just seen in post-graduate education. Even a B.tech or an MBBS will now cost substantial fees as against 10 years ago.
This brings us to the question, how much money will you need for your child’s future education cost?
If we go by the trend in price rise and expect it to continue, you will need to have a minimum of Rs. 1 crore parked aside only to cover the cost of your child’s education in the next 5-10 years. This is just a rough estimate and the actual amount could differ as per your child’s aspirations and future plans.
India has the biggest education sector in the world, however, Indian students spend nearly $7 billion annually to study abroad. The primary reason being identified for this is the low quality of higher education in the country and growing competition among students.
2. Begin investing early
Generally, children close to the age of 18 years would go for higher studies or foreign education. If suppose, your child’s age is currently around 10 years, you will have approximately 8 years to start building a corpus of savings and investments.
During these 8 years or the available number of years, you must begin investing in assets that will yield better returns. Creating a portfolio of stocks, mutual funds, and debt instruments is an ideal step forward in this direction.
The investment planning should be done in such a way that it can be liquidated easily once your child is 18. By starting your investments early, you can also benefit from compounding returns.
What if you fall short of money while funding child’s education?
Many parents often fall short of the required amount for a child’s education needs despite their best efforts. Parents need not worry as there are various affordable loan options available today that do not become burdensome due to low interest rates. It is wise to use the portion of savings set aside for your child’s education and fund the remaining through a loan instead of using up all of one’s savings for education alone.
3. Build a corpus specifically for education
To ensure that you have a sufficient corpus built for your child’s education, you must not just invest but also invest in the right avenues. Other factors like the regularity of investment and the amount of investment also play a key role in determining the corpus that you will accumulate in the future.
Let’s address these aspects in detail:
a. Where to invest?
Parents can opt for avenues like:
- Equity mutual funds that can fetch returns of around 10-12%,
- Sukanya Samriddhi Yojana offers safe and guaranteed returns,
- PPF for higher education since it is long-term,
- Debt investments as you get closer to the goal
b. How often to invest?
If you are investing in equities or equity mutual funds, it makes sense to go for SIP investments to contain the overall risk and get higher benefits in the long run. Risk-free investments like SSY and PPF also require consistent investments every year to build a long-term corpus. Bank FDs and debt investments can be made in the lump-sum format.
c. Amount of investment
This will require some backward calculation. Suppose, you need Rs. 2 crores after 8 years to pay for your child’s education. Depending on your current liquidity levels, you can invest a SIP or a lump sum amount now such that it grows to the desired future amount. If you expect your investment returns to be around 8% per annum on average and the inflation stays at 6% per year for the next 8 years, you will need to invest about Rs. 2 lakhs per month for it to grow to the desired amount in that time.
We know that education costs are not going to come down anytime in the future since inflation too is going to go up over the years. Therefore, if you don’t begin setting aside and investing funds now, you may already be late in funding your children’s higher education. So, use the above-mentioned tips to ensure that you have enough funds to meet your child’s education costs in the near or longer future.
Yes, you can buy specific life insurance plans that allow waiver of premium (WOP) benefits to cover your children’s education needs. This benefit ensures that the policy does not terminate even in the event of your untimely death or inability to pay the premium. Even if you are not around, the child will get the sum assured and the premium will be paid by the insurer.
Gold ETFs do not come with the baggage of managing physical gold as against buying gold which often carries the risk of handling it physically. ETFs are also cost-effective and allow one to buy even smaller affordable units as compared to physical gold investment which requires lump sum capital.
Although the higher education costs in India are lower compared to foreign countries, most premier Indian institutes are now charging substantial fees as compared to a decade ago.
There are mutual funds designed to meet specific goals such as children’s education needs. These focus on a mix of equity and debt investments to ensure a good risk-return balance and maximum returns in the long run.