When you plan to save and invest money, the process becomes easier with a goal in mind. This goal could just be a certain amount of wealth to be accumulated, a house to be bought, a vacation to be take, a car to be purchased or even the dream education of your child to be pursued. Depending on what the goal is, you can plan ahead and get yourself closer to it, smartly.
Is there a need for a separate higher education savings fund?
Savings funds can be divided into two parts – discretionary and essential. Discretionary savings funds are the ones driven by a goal that’s specific to you. These could be for a particular car, house, your favourite vacation or something else that’s on your mind.
Essential savings funds, on the other hand, are for events that are unavoidable. These include your emergency fund, your retirement corpus, and if you are a parent, a higher education fund for your children’s education.
Simply put, you can postpone the goals of your discretionary funds without much of an effect on your family’s well-being, but that isn’t a possibility with the goals of your essential funds. You cannot postpone a hospital bill, your retirement or the higher education of your children.
Also read: Education loans, quarantine costs and scholarships: All you need to know about studying abroad
How do you set a goal amount for higher education?
Parents often have this question crossing their mind: how to set a goal when the opportunities are so diverse and the cost is varied? The right way to go about it is to account for the best opportunities you want to give to your child, be they the best institutions in India or abroad. In addition, living expenses need to be added, along with adjustments for inflation.
There are also education cost calculators that can help you sort this out. They generally account for more variables that include the city of study, the country and more. Once you have the goal amount, a regular SIP and the power of compounding can get you there with ease when you have time on your side.
Have you accounted for education inflation and exchange rates?
Education inflation is the rise in the cost of education over time. The interesting trend to note is that education inflation is significantly more than household inflation itself in many countries. It would be intelligent to target an amount that is a little higher than the inflation-adjusted cost.
A great example of this could be the MBA programme from IIM Bangalore. The cost of an MBA in the last decade was close to Rs 13 lakh, but is now well over Rs 23 lakh. A similar trend can be seen in most elite institutions in India and abroad.
Exchange rates are another overlooked factor that come as a burden when you want to send your child to study abroad. The value of the rupee has gone down over the past few decades and if the trend continues, you’d want to have your money saved and invested in USD. This would help you in two ways, first by saving you from the falling value of the rupee, and secondly, by ensuring that you don’t have to worry about exchange rates.
Also read: Short on money for overseas education? Here’s how you can raise funds
What are the best investment instruments for a higher education fund?
Mutual funds are a little riskier compared to fixed deposits, but have the potential to deliver great returns that can keep you on the path to reach your goal. These schemes
are run by experienced personnel who have spent most of their careers in the world of finance. They work with a team that is completely invested in delivering higher returns. To add to their credibility, there are top names in banking who run their own mutual funds and have delivered consistent returns for decades.
Investing in mutual funds for your children’s higher education could deliver returns that keep up with education inflation, with lesser risk than a direct jump into the stock markets.
What if you fall short?
If you fall short of the goal amount despite your efforts, there are affordable loans that can be looked at, as these wouldn’t be as burdensome because you’ve done most of the work by saving and investing wisely.
Advice to young parents
The time that you have on your side is what remains your greatest asset. The miracle of compounding, with some discipline, can help you reach all your goals, while also ensuring that you give the best opportunities to your children. A university degree can provide your children with a platform that can catapult them to their best. For parents, I believe that’s an investment that’s worth it.