How to plan for child education expenses

In India, the cost of education increases by approximately 10% every year. Even by conservative estimate, if education cost inflation of 6 per cent a year is considered, then an engineering course that costs Rs 6 lakh at present will cost around Rs 15 lakh after 16 years.

The earlier you start planning, the better. Let’s plan,

Estimate the Cost of Education

Below is the current value, future value, monthly investment required for different education goals.

Calculation are done considering the current age of child as 1 year and child be going to school at age of 3 years, expected rate of return is 12%.

Education Goal	Current Value	Future Value	Monthly Investment
Nursery	75000	90750	3385
Jr KG	79500	105815	2480
Sr KG	84270	123380	2041
1st Std	89326	143861	1791
2nd Std	94686	167742	1634
3rd Std	100367	195587	1533
4th Std	106389	228054	1466
5th Std	112772	265911	1423
6th Std	119539	310052	1397
7th Std	126711	361521	1384
8th Std	134314	421534	1381
9th Std	142372	491508	1387
10th Std	150915	573098	1399
11th Std	159970	668233	1417
12th Std	169568	779159	1441
Engineering	450000	2274512	3679
	2195698	7200716	29238
MBA	1500000	8339876	11829
	3695698	15540592	41067

Table 1.1

Assess Your Existing Assets and Liabilities

List your assets (what you own), estimate the value of each, and add up the total. List your liabilities (what you owe) and add up the outstanding balances.

Assets	Liabilities
Money in your bank accounts	Mortgage
Value of your investment accounts	Car loan
Your car	Credit card balance
Market value of your home	Student loans
Business interests
Personal property, such as jewellery, art, and furniture

Get Yourself Adequately Insured

In case of your untimely demise, your life cover should help replace your income, keep your family afloat financially, and help your children achieve their life goals. Your life cover should be at least 10-20 times your current annual income. With a term insurance plan, you can achieve this coverage requirement and ensure financial safety for your family even in death.

Plan Your Investments Smartly

Create a portfolio; it should be a mix of diversified equity mutual fund, PPF, debt fund/fixed deposit laddering. Invest in diversified equity mutual fund and PPF for long term. Invest in debt fund/fixed deposit for short term.

For 9th, 10th, 11th, 12th and graduation create a mix portfolio of mutual funds and PPF. Allocation of funds in PPF should not be more than 35% - 40 %. Invest in SIPs in at least 2-3 mutual fund schemes but not more than 3. As you approach your time line, gradually shift to debt fund. The shift should be one to two years prior to the timeline.

For remaining education goals, invest in equity funds/debt funds/fixed deposits maturing as per your requirement of funds leads to perfect laddering. You can invest in bonds maturing three years, five years or seven years. You can also invest in fixed maturity plans.

A case study of Mrs and Mr Shetty

Mrs and Mr Shetty wants to secure the future of their son, by providing him best education. Mr Shetty, 37, a salaried individual earns 150000/month while wife is homemaker. Their monthly expenses are 50000 leaving them with saving of 100000. Cost of education is as per table 1.1.

Assets	Amount	Liabilities	Amount
Money in your bank accounts	150000	Mortgage	3000000
Value of your investment accounts	200000	Car loan	500000
Your car	800000	Credit card balance	25000
Market value of your home	7000000	Student loans	0
Business interests	0
Personal property, such as jewellery, art, and furniture	1500000

 

Flat is self-occupied; it should not be used for planning purpose. They have cash in hand, some amount in equities. Gold is mostly in jewellery.

For 9th, 10th, 11th, 12th and graduation education goals Mr Shetty must invest Rs 9323 monthly in a mix portfolio of mutual funds (65%) and PPF (35%) with different timelines in mind.

For remaining education goals, a mix of equity, debt fund, FDs, FMP should be included. Create a ladder of investments with different maturity dates. It is not necessary to start investing for all education goals at the same time. Please keep in mind that if you are starting late for a goal you may have to invest more. If you can invest lump sum amount, select FD and FMP with duration as 1,3,5,7 …. You can start investing in SIP with target timeline for remaining education goal years.

Happy Investing.