How to financially plan for your child’s education?

An old proverb says: ‘Give a man a fish and you feed him for a day; teach him to fish and you feed him for a lifetime’. A good education for your children is like the latter.

How to financially plan for your child’s education?

Last weekend my wife and I hosted a Sunday brunch to celebrate my daughter’s return from the US after successfully getting an MBA degree from Stanford Business School. She’s soon going to return and begin working in an MNC as a marketing and communications specialist. 

Along with all the congratulations and compliments, I also got a lot of questions from my guests – friends, family, and neighbours: “How did you manage to afford a foreign degree at such a prestigious college?” “What a brilliant child you’ve raised! Do give us some tips!” “You always managed to put her in the best schools and colleges; how did you financially manage that?”

I don’t want to take any credit away from my daughter – she’s worked incredibly hard and has always been smart and motivated. But I do feel happy and proud that I was able to provide her with all the right opportunities. Here’s what I did to ensure that I could give her the best future as a parent, and so can you:

1. Start early; like right now

I know it’s hard to think about things like education and career when your baby is born and is still a cute toddler who has yet to learn to walk and talk. But as every parent in the world will agree, time flies when your children are growing up. The days may seem long, but the years are short. Whether your wife has just become pregnant, or your child is a few months old, the right time to start planning and saving for their education is now – the minute you realise it.

Related: How prepared are you to meet your child's education cost?

2. Have a plan in place

Right from preschool to post-graduation abroad, you need to financially plan for it all. That’s about 24–26 years’ worth of educational outlay, so when you sit down to jot down these expenses, the amount could seem massive. If you have more than one child, that number is going to double or triple. But don’t let it scare you because you don’t have to save all of it right away. And you don’t have to do it alone. Sit with your spouse and your financial advisor, if you have one, and come up with a solid plan. 

3. Plan well for inflation

If you’re doing this on your own, make sure to account for inflation. Considering the trends in the education industry, and the fact that the inflation rate here is above the global average, the figure would be roughly 10–12 %. A two-year MBA degree from a top B-school in India can cost as much as Rs 20 lakh these days. So you can imagine what the fees will be like a couple of decades from now. Do not make the mistake of ignoring inflation!

4. Keep increasing the amount you save

Depending on when you start and how much you’re earning, you may be contributing a fixed amount every month towards your child’s education fund. But as your income increases, debt gets paid off, and other financial situations change, you should keep increasing your monthly contribution as well. Use this calculator to help you calculate how much your child's education will cost. This can work wonders to come up with a sound education plan and subsequent investment plan to secure your child's future. 

5. Account for expensive coaching classes

The Indian education system is highly competitive. From getting into the best private schools where your child can build a strong foundation to pursuing professional courses like CA or MBA, coaching classes play an important role. Besides, there’s an entrance exam to get into just about any prestigious school. Coaching classes, depending on what they are for, can cost between Rs 1 lakh and 3 lakh a year. 

Related: Your child’s foreign education: can you afford it? 

6. Let your child make their own choice

Once your child is old enough, let them make their own decision in terms of which stream they want to pick and what career they want to pursue. If you don’t give them that freedom, they may begin studying for a degree like law or engineering but drop out midway due to lack of interest. This can not only affect your child’s mental health and waste their time, but also squander your hard-earned money. On the other hand, if they pursue something they like and are good at, they will naturally progress well in that field. 

7. Keep yourself informed

Today, unconventional careers often pay better than traditional ones. Social media influencer, YouTuber, digital marketer, etc. are jobs that pay quite well and are interesting too. Over the next few years, more of such unconventional jobs are going to come up. Try to be in the loop and open to new ideas. Also keep yourself informed on the kind of colleges, scholarships, and educational routes that are available.  

8. Be clear about gifts

From the beginning, I was very clear with my parents (and my wife’s parents) about gifts for my daughter. The occasional toys and clothes are fine, but when they really wanted to get her something for a birthday or school achievement, I suggested that they contribute an amount to her education fund. You should have an honest conversation with your extended family about this. Every little bit counts and goes a long way. 

9. Get life insurance 

You absolutely must get life insurance. Yes, it’s a worst-case scenario, but considering the uncertain nature of life, anyone can suffer an untimely demise. You need to figure out your family’s expenses and liabilities, and your assets and income, and accordingly get a life insurance policy to secure your family’s financial future. Your spouse should get a life insurance policy too. 

Related: What should you save for first: Retirement or your child's education?

10. Be flexible 

As the years go by and your child grows up, you may have to make changes to your their education plan. Maybe they want to do something like medicine, which would almost double their college education years. Or perhaps they are learning a foreign language and want to spend a year in a particular country to be able to speak it fluently. You need to be flexible with such situations and rework your financial plan. 

11. Create separate  portfolios 

It’s best to create a separate investment portfolio for your child’s future needs to be able to manage those funds better. If you have two or more children, do not merge all their educational funds. You should create separate investment buckets for various education costs that will come up at different times – short-term, medium-term, and long-term. 

12. Avoid low-return investments 

Since a major chunk of your child’s educational fund will be used after many years and qualify as a long-term goal, equities are the way to go. Not only do they provide higher returns and reduce the burden on you in terms of how much you need to invest compared to low-return investments, they also deliver better inflation-adjusted returns. 

Here’s where you can invest:

  • Mutual funds – Mutual funds are a good option for equity-oriented instruments. Opt for diversified mutual fund schemes and start a systematic investment plan (SIP) for 3–4 different funds. Make sure you have a good mix of mid-cap and large-cap funds. As and when the need arises to fund an educational cost, you can redeem the units – while keeping the investment going. For short-term needs, if your current income can fulfil them, try to use that first. .
  • Child ULIPs – These days, a lot of insurance companies offer unit-linked insurance plans (ULIPs) that are designed to meet a child’s educational needs. Some come with single premiums as well as free asset allocation; these can be a good additional option for your child’s education plan investments. 
  • PPF – You can also consider investing for your child’s education plan through a public provident fund (PPF) in their name. Since it’s a 15-year scheme, it’s perfect for college and higher studies. It also helps you create a tax-free education corpus. Moreover, funds can be withdrawn partially after six years, so you can use them on a need-basis. However, it’s important to note that PPF is a debt investment, because of which the inflation-adjusted returns would be low.

Without being unduly humble, I can at best describe my household as middle-class for the most part. So, if I could invest carefully and give my daughter a bright future, you can too. It’s all about strategic planning and being consistent. Don’t let yourself get overwhelmed or be swayed by what others say. You know the best for your children, and a good education is the best thing you can give them. Your investments today can help them build a good life for themselves in the future. Here are some major expenses along the educational journey of a child.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.

 

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