Planning for your child’s future education is not a trivial thing to overlook. You may think you can “cross the bridge when you come to it”, but by that time you may realize that you don’t have enough funds to get your child admitted in his/her dream college. Taking all scenarios into consideration, for example if your child decides that he/she wants to pursue higher education abroad, you would need the appropriate funds ready. Hence, it’s important to start saving early so that you have a substantial amount of savings before your child starts schooling/college.
Start Saving Early
It’s always better to start saving for your child’s education from when he/she is born. By the time they turn 18, you would have enough money to send them off to college without hassle. College fees that are being paid now will look insignificant compared to what it will cost in the future. As the years pass by, there will definitely be an inflation. So, one cannot assume that the tuition fees will remain the same throughout the years. Having a right-sized fund for each of your children would need a good plan. There is also an option of relying on loans but it would be better to start saving earlier than paying off education loans along with interest rates later.
You can start saving keeping in mind your family’s combined income. After estimating how much the educational expenses would cost, you can take out a small portion of your family’s income every month and put it in your savings. This way if you start saving when your child is born, you would have enough money by the time he/she is ready for college. After saving up a good amount of money, you can start investing and watch your money grow.
Factors to take into account before diving in
If you are planning to start saving before the birth of your child then it’s well and good, as you will have more time to plan your child’s financial security in a better way. But it’s never too late to start saving for your child’s future. If you have been saving regularly for 18 years, you would have enough funds. However, if you start late on your saving endeavour, you could still catch up by increasing the amount you are planning to save every month. With the number of years in mind you can start planning accordingly, but the longer the time horizon, the better the savings.
Cost of education
The amount you save every month will depend on the time from which you started your savings. The earlier you start your saving plan, the less you would have to put in your monthly savings. If you want to plan ahead, assuming that your child would want to do a masters abroad, the amounts will differ.
There may be circumstances where you might not be financially stable to cover all the educational expenses at that time. It’s always better to be prepared and know how much it’s going to cost in the future. You can always calculate how much you can expect the tuition fee to be according to inflation, but it will vary and you can’t expect an exact estimation. For example, we assume the cost of education today comes up to Rs. 16 lakhs and the expected annual inflation rate is 6%, the fees would be near Rs. 43 lakhs by the time your child is 18 years old. This will be the case if your child is currently 1 year old.
You should take into account how much you have saved now and how much you have to save. Once you have a good amount of money you can either opt for a SIP (Systematic Investment Plan) in mutual funds or you can also consider a Recurring Deposit with a bank.
Additional Reading: Top 5 Recurring Deposit Scheme in India
Saving every month will help you accumulate the money you need but once you have enough funds, you can start investing. Your saved amount can be used for investments in SIPs, ULIPS & PPF for children.
Systematic Investment Plans (SIP)
It’s always a good practice to make money work for you, rather than working for money. Saving money is something everyone undertakes, but you can be smart and invest your money and watch your money grow. Systematic Investment Plan (SIP) allows you to make small investments at regular intervals to help you achieve your dreams. With SIP, if you invest regularly for a longer term, your money will grow overtime as you will earn returns on your invested amount. While saving for your child’s education, it’s best to start saving early and invest immediately. This is because the longer you are in the investment cycle the more returns you will earn.
Benefits of SIP
Convenience - You can invest in a disciplined and phased manner using SIP. It gives you the convenience to start your investment with an amount as low as Rs 500/month
Mitigating Stock Market Risk - Many a times the stock market can be volatile and if you regularly invest in a SIP, you don’t have to time the market. You can buy more units when markets are low. This reduces your overall cost of investment
Power of Compounding - Compound interest ensures better long-term benefits compared to one time investment
Higher Returns - As compared to the conventional RDs and FDs, SIP gives higher returns to beat inflation in an efficient manner.
Unit Linked Insurance Plan (ULIP)
A unit-linked insurance plan is offered by insurance companies which gives investors insurance coverage and an investment plan under one single scheme. With the rising costs of education a plan has to be set for investing. On the other hand, if something unfortunate happens to you, a back up plan needs to be in place to take care of your child’s education. That’s where having a ULIP will help you get as it provides you an insurance plan and investment plan together.
Benefits of ULIP
Flexibility - ULIPs offer a whole host of high, medium and low risk investment options under the same policy. You can choose an appropriate policy according to your risk taking appetite. ULIPs provide the flexibility to choose either the sum assured or the premium based on your needs.
Liquidity - In case of any unforeseen future events, ULIPs also let you do a partial withdrawal; wherein after the first 5 years you can withdraw funds from your Unit Linked account.
Disciplined and regular savings - ULIPs help you inculcate a regular saving habit, which goes a long way in building a corpus for your child’s future.
Tax benefits - The premiums paid towards the policy are exempt from tax under section 80C.
Public Provident Fund (PPF)
Public Provident Fund schemes are popular long term investment schemes with no age limit for opening an account. So you can take a PPF for your child as it offers safety with attractive interest rate and returns that are exempted from tax. As a PPF account comes with a lock in period of 15 years, you can get a lump sum maturity amount by the time your child is ready to go to college to pursue his/her dream course.
Benefits of PPF
Risk-free returns: The Public Provident Fund is backed by the Government of India. So, one of the most significant PPF account benefits is that it is entirely risk-free. The returns, too, are guaranteed by the government.
Multiple tax benefits: The biggest benefit of a PPF is that it has a exempt-exempt-exempt (EEE) tax status, one of the only investments in India to enjoy such an advantage. Investment amount up to Rs. 1,50,000 is tax exempt, the interest you earn is non-taxable and the maturity amount you get after 15 years is also tax exempt. This makes it one of the most tax efficient investments.
Flexibility: You can open a PPF account with a minimum of Rs. 500 and a maximum of Rs. 1,50,000 per year. You can make these investments in a maximum of 12 instalments or as a lump sum.
Partial withdrawal and loan facilities: Although the PPF has a 15-year lock-in period, you can take a loan (up to 25% of the balance available at the end of two years preceding the year in which you apply for the loan) between the third year and the sixth year. You must repay the loan in 36 months, the rate of interest is 2% higher than the interest you earn. From the seventh year, you can make partial withdrawals from your account. Besides, partial withdrawals, you can prematurely close your PPF account if you need the funds for severe medical treatment or for higher education.
Having a clear plan in mind when it comes to your child’s education is very important. This is because there will be a huge difference between the current educational costs and the future ones. Hence, it's very important to have a clear savings & investment plan in a phased manner for your child’s financial security