Saving and planning for your child’s education can be a daunting task for many parents. The level of responsibility and the amount of money that one has to save and invest requires a lot of wisdom and knowledge. This blog will look at the need to have a financial plan for your child’s education and some easy steps.
If you think that there is enough time to plan for your children’s education, think again. The best and first step you need to follow if you want your child’s dreams to become a reality is to invest in their education ASAP.
Don’t trust us? Let us look at the figures.
Let us assume you would like it if your daughter does an MBA from a prestigious college in the US. She is too young to understand, but you want to be prepared.
To help you understand the importance of early investing, let us consider two scenarios. In the first scenario, you invest when she is three years old, and on the other hand, you invest when she is ten years old. If we assume that she might want to pursue an MBA at the age of 21, then considering an inflation rate of 5%, you will need to accumulate Rs.2.41 crore and Rs. 1.71 crore respectively.
However, you will require a monthly SIP of around Rs.31,000 when she is three and almost the double SIP amount if you invest when she is 10 years. This is the power of compounding. The sooner you invest, the better.
Now that you understand the necessity of child education planning, let us go over some basics that will assist you in deciding about your child’s education.
Know how much time you have
Calculate your child’s graduation year and post-graduate years. You can determine the time horizon by estimating the number of years.
Figure out the total education cost
The first step is to determine the overall cost of your child’s education. This depends on several things, such as whether your child wants to have a global education or prefers to study somewhere closer to home and the discipline that your child likes.
Know where you financially stand
To get a sense of where you are today and how to plan for the future, make a note of all of your assets and liabilities. This can assist you in making better plans. While preparing for your child’s education, keep in mind that you should avoid dipping into your investments for other financial goals, particularly your retirement fund.
You should also avoid using funds set aside for your child’s education for non-educational purposes, such as house renovations.
Decide how much you need to save/invest
Once you know how much college will cost, you can plan accordingly. Decide how much you need to save right now or how much of a monthly contribution you’ll need to meet this goal by the required time.
One simple way is to start a Systematic Investment Plan in a mutual fund and make regular contributions for your child’s education plans.
To make a more significant contribution, you can eliminate unnecessary items from the budget or look for an additional source of income.
Asset allocation and rebalancing
Asset allocation is the breakup of the different assets, such as equities and debt in a portfolio. Proper asset allocation and investing are the smartest way to invest as per the time horizon and risk profile.
You need to make sure that the asset allocation will help to achieve your child’s dreams.
If your investment horizon exceeds five years, consider investing in equity funds, which have the potential to deliver higher long-term returns.
Rebalance your investment portfolio gradually towards fixed income or debt as you get closer to your goal.
A well-thought-out asset allocation boosts your portfolio’s returns. It can also operate as a shield, protecting your invested amount during times of market volatility.
If you are a parent or plan to raise a child, you shouldn’t delay investing in their education. With the rising education costs and volatility in the job market, quality education has become imperative. So, start planning for your kid’s future today and make their dreams a reality.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual fund investments are subject to market risks, read all scheme related documents carefully.