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Financial Planning for Children's education

Published: Jun 19th, 2020 09:31 pmBy Ayan Chatterjee

For Indian parents, one of the biggest goal of life is to ensure that their children get the best education possible. They are ready to sacrifice a lot in their life to ensure that this dream is achieved. Whenever I have met a client for his financial planning and asked him " What would you like your child to become?", I got a common answer from more than 90% of the parents. And that is "I would like him/her to pursue his/her dream. I just want to ensure that finance should not be the challenge".

To discuss this further, lets talk of some data.

The cost of education is inflating at a much faster pace than normal inflation. That means that though we are are happy with an inflation rate of 4-6%, the cost of education is increasing at a much faster rate. Few article shows that cost of education is inflating at 12-15% year on year.



Lets understand the impact of this inflation in monetary terms. Every parents want to finance the dream education for their children. Those dream education can be medical, engineering, management, law among the common one. However, in today's world the options are more, like they may decide to be an architect or a pilot or a singer or some other uncommon profession. The cost of education will totally depend on which stream they choose and also which educational institute they choose.

However, lets take an example of medical education. The cost of medical education across public and private institutions vary widely. We also need to remember that the options with public institutions are quite limited considering Indian population. Hence its important that the planning should happen keeping private institutions in mind.

As of today, medical education in a private institution will cost around 25 lacs. If my child is currently 8 years of age, then this money will be required once he reaches the age of 18, i.e 10 years down. If we consider the cost of education inflation to be 12%, then this same education will cost me around 77.64 lacs and if we consider the inflation to be around 15%, then the same will cost me around 1.01 crores. Hence, to be on a safer side we should be ready with a fund size of anything between 75 lacs to 1 crore, 10 years down the line to fund my child's dream education.

That will give you a rough estimate of the impact of inflation on cost of education.

Though this fund can be arranged thru education loan when required, however a possibility of getting a loan will depend on lot of other factors. Any institutions will have its own credit policy which will include the meritocracy of the student, the current income of the father, the loan repaying capability.

Hence, to be on a safer side, its better to plan and save from today, so that we are closer the goal in terms of the fund and any small shortfall, if any, can be made out of loan.

To answer the question on how much do we need to save to ensure that we have around 1 crore corpus 10 years down the line, its important to determine how much return do you expect from your investment portfolio. The investment portfolio in turn will depend on the clients risk appetite.

A Certified Financial Planner is qualified to evaluate the client's risk profile and accordingly suggest him the investment instruments.

For the sake of understanding, lets say your investment will generate an annual return of around 12%.  Then you will be required to invest approximately 43k per month.

Now comes the biggest challenge - "I don't have the money".

Since, the dream is yours, hence the solution lies with you only.

  1.  Sacrifice your current lifestyle so that you can increase your savings.
  2.  Save less now, and take a risk post 10 years of arranging the balance thru education loan. But remember, there may be a chance to sacrifice your child's dream if the loan does not happen.
As a responsible parent, I am sure you would like to opt for the first option.

If you are interested to know more details, or want to plan finances for your children's future, please feel free to write me at [email protected]

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