Manikaran SingalCertified Financial Planner
Children’s education has always been among one of the top priority goals for everyone. Every parent wants to provide the best of education to their kids and better than what they themselves had got, which makes this a very emotional goal too.
Children’s education is a time bound goal. You have specific number of years during which you need to save enough to achieve the desired result. You cannot postpone this goal. Though you cannot be sure which way the child’s interest will develop and which specific field she’ll get into, still you would want to be prepared to provide for this responsibility as much as you can.
While schooling costs cannot be planned for, it should be a budgeted as a part of your monthly cash flow management. Expenses towards schooling should not lead you to compromise on saving towards other goals like higher education.
Emotions always take you away from reality and you tend to make such mistakes which may prove to be very costly to your goal. I am going to point out some of those mistakes which if avoided can be beneficial to your financial planning at large.
1. Get your basics right :You should understand that good education is not only about studying in a big reputed college, it is about building character, learning to earn and give respect and all this starts from home. Though good schooling is important but your upbringing also matters a lot. By spending time with your kid, playing with her, joining her in vacations, attending her school’s annual functions and parent teacher meetings etc. you are inculcating character and family values into her and that is the best education. Getting emotional about the school she should attend, college she should go in future and to keep on working 9 to 9 to fulfill these aspirations, you end up losing those valuable moments with your child which will do no good.
In such a fast paced world providing good education seems to be a daunting task. So we find solace in getting our kids admitted in “so called hi fi and perfect” school which is expected to give everything which we are not able to provide. Doing this does not guarantee her comfortable future. Your handholding, your personal attention, your family group activities etc. works a lot in making her a good human being. 2. Under estimating the college expensesNow when you have decided on the school and college where you want her to study, you need to estimate the cost of education. It is not only the college fees , but many other related expenses too like hostel expenses, mess bill, cell phone expenses, pocket money, transportation cost etc. So it is always better to increase the estimated college cost by 10-15% to cover up the other overheads.
After arriving at the estimated present cost of education, you have to increase this figure with an appropriate inflation rate. This is where many people tend to make a mistake by underestimating or totally ignoring the inflation factor in education cost. People buy child insurance policies looking at the benefit attached without considering that how these benefits would be useful at the time of need.
Its better you track the expenses of the fee structure of your ‘Target’ college or university and take an estimate of inflation rate by looking at how costs are actually rising. In my experience it ranges between 10%-12%, and always remains 4-5% more than normal CPI. 3. Select investments wisely : You need to understand that you cannot reach a target whose cost is rising at 10% by investing in a product which generates 8%. Also as this is a certain and time bound goal, you cannot take risk by saving in an illiquid asset like real estate. It would be even wrong to assume that investing in child insurance plan or PPF or bank fixed deposit will lead you towards your goal.
You need to have a proper asset allocation and tracking of the changes in goal costs, so you can do timely rebalancing to reach goal safely and surely.4. Not buying adequate insurances:Your child’s future can never be secure, until you are adequately insured. More number of policies are of no use if the insurance cover is not satisfactory. Have adequate life cover, health cover and accidental cover so your savings should remain intact for your goals in case of any mishap. 5. Avoiding retirement planningThis is one of the biggest mistakes which people tend to make when they look at their goals emotionally. Doing investments just to make kid’s future secure by putting your own future at stake is a very risky proposition. You should understand that for education costs there are loans or scholarships available but retirement expenses have to be arranged from own savings. Even for education loan your guarantee as a parent would be required, and if you don’t have much of savings in your name you won’t even be able to guarantee the loan. It is always wise to choose retirement as a priority goal over kid’s college expenses. Financial planning cannot be worked on in bits and pieces. Children’s education planning is one of the important goals, but it should not be looked upon in isolation. Let these goals be a part of your holisitic planning, it will help you will have a better balanced financial life.