It is better to start with two important numbers – the future value of the goal and the time in hand
Education has become very important part in each and every bodies lives. And for the urban middle class families with kids it has somehow become a significant cost head. The school education has really become very expensive than it was teo decades ago. And thus the Personal finance experts are quick to point out that the regular income is sufficient to pay for the school education. The real challenge stands ahead is funding higher studies that is the post graduate and masters degree.
It’s not that parents avoid the need of creating a corpus, they are aware of it. It’s just that it is bit difficult for them to estimate how much they are going to invest in their child’s education. Making an estimate is difficult because of two factors – first, it is a long term goal and second, they do not know which course the child will opt for.
“It is all about assumptions now. So you should be focusing on what you can afford now,” says Pankaj Mathpal, founder and CEO of Optima Money Managers.
For example, if you think an engineering degree is a minimum you would be willing to pay for, start with it. If it costs Rs 10 lakh, then apply inflation to it. Education costs in Indian premier institutes are escalating at 10 percent CAGR and hence you should factor in that in all your estimates.
If you expect your kid to take up specialization overseas, there are certain factors you need to cost in. If you expect your child to go overseas, it’s better to take an education inflation in that country before hand and also know the current impact on it.
If your child aims to go to the US for higher education, you should know about the rate of education inflation is around 5 percent in the US and the foreign exchange rate movement in the US dollar and Indian rupee.
Even though the numbers may look simple, you would also be spending much on the lifestyle. If your child is going overseas or plans to stay in a different city, then you should also account for this following things in your calculations as the cost of education also includes travel costs, hostel expenses that can be a sizeable amount.
One must stay away from child focused products as advised by the financial advisors as many of these come with problems such as high costs, stringent conditions about payoffs, lack of intermittent liquidity among others. For example, there are many child plans that we come across that promises to pay in instalments when the child reaches the age of 18, 20 or 22.The issue is education related payments may not happen at that time and one may be forced to take costly short-term personal loans.
Sukanya Samriddhi Yojana (SSY) is one of the best investment options available for a girl child as it pays the highest tax-free rate of interest with a sovereign guarantee. But the payoffs take place when the girl child turns 18 and 21 years of age. The education provider won’t wait for payments in the interim period.
Mutual fund schemes that dedicated for funding child’s education come with a lock-in till the child turns 18 years of age and they invest around 65 percent to 75 percent in stocks. If your money is not shifted to safer fixed income options due to the lock-in period before your financial goal is achieved, there is a chance of the corpus value eroding if there is a massive correction in the market.
It is better to start with two important numbers – the future value of the goal and the time on hand.
Manage cash flows
Financial planners emphasise on the ‘in-built flexibility’ in your investment plan. When you are saving to create an education corpus, you do not know how the future will be. The cash flow needs may be far different from what we foresee them now. When we consider a situation wherein an individual has planned for graduation in an Indian institute and post-graduation in an overseas institute, but the reverse happens. In such a case, the amount and timing of cash flows will be very much different from what we had foreseen.
Handling cash flows are a tricky area for most parents. A foreign vacation dream by a year or two just because you are running short of money. But a kid’s education can’t be postponed. Many individuals buy a property or land and keep it for funding their kid’s education. They should be selling that asset at least two years of the timing of payment. Physical assets like land or a house to fund a future financial goal are best avoided because of liquidity problems.
A word of caution
Do not fall for any investment plan. One should increase their savings and investments if they have the child education goal in their financial plan. Whatever fund they have created over their earning lifetime, can be supported by education loans which are relatively cheap. One must always remember that you can get a loan for anything from buying a home to fund education and not dig all their funds for the retirement. But they should also keep in mind that they won’t get a loan to fund their retirement. So make your decision wisely.