FINANCIAL PLANNING FOR YOUR CHILD'S HIGHER EDUCATION

FINANCIAL PLANNING FOR YOUR CHILD’S HIGHER EDUCATION

·      The price of higher education in India increases at a much faster rate than the general rise in prices, i.e. inflation, and is sometimes nearly double the rate.

·      As a thumb rule, you should consider that every year the cost of higher education will go up by about one-sixth.

·      It means that a specialized course costing Rs.1 lakh this year would cost you Rs.1.16 lakh next year and nearly Rs.1.35 lakh two years from now.

·      It means that the same course will cost about six times in the next 13 years.

·      It would become an increasingly uphill task when you realize that your annual rate of increase in salary is less than the rate at which the cost of higher education is rising.

·      Therefore, you need to have a long-term financial plan that can rise at the rate of 16% or more, and at the same time not take too much risk.

·      The best solution is to plan early in your child’s life, and also to have a strong plan.

·      The first part is to ensure that your child has enough financial backing when it is required for its higher education.

·      The second part is to consider the worst case situation of you not being there.

·      For the second part, it is advisable for the main earning member to take a pure term life insurance policy of a substantial amount and equal to the years left for the child to go for the specialized course.

·      For example, if you estimate that your child would go for a particular course after say 12-14 years from now, then take an online term policy of about Rs.50 lakh for 14-15 years.

·      After taking care of the second part, you can choose various options for the first part, i.e. financial saving, by taking some calculated risks with time on your side.

·      The options you can choose from are either to buy a children’s insurance plan or invest in a balanced mutual fund, both of which are offered by mutual fund houses too.

·      It is not advisable to go for pure equity schemes for this purpose, since here the risks are much higher than the other two.

·      Settle for a step-up systematic investment plan (SIP) during the initial years, depending on the pace of your earnings growth, and stick to it for the entire term aimed at your son’s specialized education.

·      After investing in a good plan with years of disciplined contributions, your aim in the final round should be to preserve the corpus that has been created for your child.

·      So as you near the time when your child would need the money, it would be prudent to slowly shift the corpus to less volatile bond funds.

·      The strategy could be to move to a debt fund 2-3 years before one needs the fund.

·      With such a strategy, even if the equity market goes into a sudden fall, debt being less volatile, there is every chance that your corpus wont go down much.