Child’s education is a very close to the heart dream for any parent. Who doesn’t want to provide the best children to their child? But sometimes there is a conflict between serving your own goals and those for your child. The way to resolve the emotional conflict is to first understand the numbers and then work out a solution. Read on.
Vikas has just hit 30 and is parent to a 1 year old daughter. He wants to offer the best to her specially the education. He knows how education has made a difference to his own life.
While Ira, his daughter, is a bundle of joy for him, beyond measure, he does want to measure what he can. In this case, it is how much and where should he save for her education.
In about 17 years, she will step into her higher education. That’s the time Vikas will touch 48. This is where his conflict is.
At 45, he has plans to pursue a different career, may be not even work full time. He wants start something of his own. However, he wants to ensure that by then he has provided for all his major financial goals.
Of course, one of the key goals is Ira’s education.
How does he plan for this scenario where he has less time to save? What story do the numbers tell? Let’s find out.
Child’s Education – How Vikas went about resolving the issue?
Vikas has estimated that Ira will need close to Rs. 25 lakhs to pursue studies (engineering, doctor, MBA or a combination). Yes, the cost varies widely, but he has set this limit for now. Of course, he completed his education in much less.
Remember this is the cost as of today. In 17 years, this will go up significantly. Even if he assumes a rise of 8% a year, this would mean a future cost of close to Rs 93 lakhs.
Now, to achieve this goal, he will need to invest. There is one more boundary set – he can save and invest till age 45.
His portfolio will a combination of assets that can deliver a reasonable rate of return over this time frame. He works out on an expected return of 10% per year from the portfolio with a combination of equity and debt.
Here’s the summary of the assumptions.
- Ira’s age today – 1
- Fund required at age – 18
- Years to fund requirement – 17
- Time to save – 15
- Cost of education – Rs 25 lakhs
- Rise in cost – 8%
- Expected return – 10%
Let’s put this all together.
Using the Child Education Planning calculator from Unovest, this is what we see.
As you can notice, the current requirement to save is Rs. 19,012 a month over the next 15 years to achieve this goal. Vikas finds this to be a stretch considering there are other goals too that demand allocation from his savings.
So, he makes some changes.
First, he sets aside Rs. 3 lakhs of his existing investments towards Ira’s education. They are in safe investments and are expected to grow at about 8% a year.
Next, he plans to increase his savings every year by 5%. This will take off the saving pressure from the initial years.
Taking these into account, this is how the goal numbers look like.
As you can see, after accounting for Rs. 3 lakhs already saved, he still has to build a fund for Rs. 81.4 lakhs.
To build it, he needs to save Rs. 15,581 per month, in the first year and then increase it by 5% every year.
This is certainly more achievable for Vikas.
He has a better understanding of what he needs to do for Ira’s education. Of course, he will evaluate the numbers regularly and see if he needs to upgrade the goal value and / or increase savings towards it.
Yes, his own goals are important but not at the cost of Ira’s education.
Can you now help find out how much Vikas will need to invest per month if he saves for the full period?
Go to the Child Education planning calculator and work this out for him. Do share in the comments space.
What about you? How are you planning for your child’s education? How ready are you to work towards this goal?