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How Much Should You Save For Your Children’s Education?

Aug 07, 2018 | 2 years ago | Read Time: 4 minutes | By iKnowledge Team

Picture this, you spend your twenties working extremely hard, dreaming that you will be able to provide for your child in any way possible, send them to the best schools, colleges and even help them pursue a PhD perhaps. Cut forward 10 years, your child is about to head into high school and you didn’t estimate the rising cost of school education correctly, forget even paying for college. The scenario is a nightmare for any parent, and to avoid it there is only one solution: saving effectively so you have a onetime investment plan for your child. Rising costs of education across the countries has made the cost of raising children even more expensive for parents who are struggling to make ends meet. However, smart saving rather than scared saving is the need of the hour and will prevent you from blowing your retirement fund on your children’s education. Here’s are the three steps you can follow to truly understand how much you should save for your children and having effective investment planning skills:

Step 1: Estimate what you will need

Education has become a major part of household budgets with surveys showing that over 65% of parents money is spent on children’s education. The scary part? This figure is likely to keep rising. Majority of parents already spend on an average around Rs 18-20 lakh on raising their children even before they graduate from high school.

According to a report by the National Sample Survey Office (NSSO) average private expenditure for general education has increased by 175% to over Rs. 6,788 per student. In Delhi itself the cost of general education has increased three fold since 2009.

The increase is not limited to parents seeking to admit their children into private schools, a few years ago Kendriya Vidyalaya increased fees three-fold from Rs. 4,500 to Rs 12,000. The figures for higher education are likely to give you even more of a shock with an average MBA degree estimated to cost around Rs 50-60 lakhs by 2025 and an average engineering degree estimated around Rs 25-30 lakhs.

Parents likely to feel overwhelmed by numbers are likely to adopt a defeatist attitude about children’s education and enter panic mode. However, parents need to adopt smart saving techniques by estimating the inflationary costs of education and start to save for the same as soon as possible.

Step 2: Start saving as soon as you can

A key advantage parents have if they start saving early is that they have around 10-12 years to save up for a long-term goal as costs of education rise with age, with the highest being for high school, college or technical and vocational courses. Not only does starting early give you peace of mind about being in control of your financial future, it also gives you a wide variety of investment options and reduces the yearly burden on you to save.

In simple terms, if I want to have Rs 25 lakh to be able to pay for my child’s engineering degree in 2035 (keeping into mind the cost of inflation), I have about 12 years to save, which means I only must save overall around Rs 2 lakh per year, which roughly translates to Rs 21,000 per month. Having a long-time period as a cushion, also enables parents to mix risk taking and safe savings, thus improving their overall ability to save over the years.

Step 3: How to save

Old school thinking propels us to believe that cash in the bank is the best way to provide for our children and their future. However, this is perhaps the most ineffective way to achieve long term financial goals, given how the low interest rate market doesn’t even effectively match up to rising costs in the country.

Thus, parents need a highly effective savings plan involving different kinds of investment tools to prepare for their longer-term goals. The plan will vary upon when you decide to start saving for your children’s education, and as discussed earlier, the sooner you decide to start, the better. Parents with lesser time to save for the big expense of their children’s education often prefer to invest in more “safe” options, such as a mixture of stocks and bonds, and even at times in monthly income plans from mutual funds. Market experts also advise for parents to invest in recurring deposits scheduled to mature when their kids go to college. While younger parents have the advantage of a cushion and can take risks, including large scale equity investments, for parents who have teenagers and are just beginning to save, their primary goal should be capital protection.

Often parents find themselves bombarded with financial information about investments: online, in newspapers, through friends, relatives and countless other sources all claiming to know the best investment for children. However, if you have taken the smart decision of saving for your child’s education, an even smarter decision is to seek expert guidance in doing so. There are too many factors to think about here: what risk should you take, what is your saving methodology and how to protect your retirement fund, and an education saving plan will help you solve your problems.

An ideal plan would be something like one offered by Aegon Life Insurance called the “iMaximize” plan which aims to provide parents with a combination of protection and market linked returns, thereby, ensuring they can take advantage of the money they are investing, but at the same time ensuring their life savings are in safe hands. Regardless of the plan you choose, it is important to review it every year and make sure you are meeting your saving targets.

So, what are you waiting for? Stop worrying and start saving!

Advt. no.: II/Jul 2018/4279


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