Save for your children’s future from their infancy

Dev Ashish

Providing for their children's proper education is an important goal for most Indians. And this is unlike in the West where children have to fend for themselves. Lucky Indian kids! But what about the parents?

Apart from making sure that children get a good education (which means spending tons of money on it), they also have other important goals such as buying a house, and saving for their own retirement.

Let’s see how best people can plan for their children’s future.

Starting early is the key

How early?

It is good to start as soon as the kid is born, as it gives a runway of 15-20 years to save for higher education (graduation at 17-18 plus post-graduation after 21-22) and 20+ years for marriage (assuming you wish to fund it).

Agreed that when the kid is born or even when he/she is 5-6 years old, you won’t know what exactly he/she would be interested in after several years. But you cannot wait for the child to decide a career path and then begin saving. It will be too late by then. Instead of waiting, make certain assumptions in line with current trends and begin as soon as possible. And when the child’s aspirations become obvious in later years, make course corrections and align financial assumptions with his/her aspirations.

Let’s say you wish to fund your seven-year-old daughter’s higher education. After some homework, you find out that the following are the costs:

• Graduation - Rs 15 lakh today
• Post-Graduation - Rs 25 lakh today

But the daughter is aged 7 and would go for higher studies after years. So luckily, you still have time. How much time?

• Graduation - after 11 years
• Post-Graduation - after 15 years

And assuming 8 per cent inflation, the actual amount required will be much higher:

• Graduation - Rs 34.9 lakh after 11 years
• Post-Graduation - Rs 79.3 lakh after 15 years later

This is what is required (as education corpus) to fund your daughter’s higher education. Do not commit the mistake of calculating the corpus based on just present costs and ignore inflation.

Now let’s come to the part about why you need to start early.

Suppose, you and a friend, both have 7-year-old daughters. And both plan to save for their graduation and post-graduation. The difference is that you have just begun saving and your friend started saving Rs 5000 as soon as his daughter was born.

So how does it change the investment requirements for both?

Note:

(1)Unlike goals such as house purchase, the requirements in higher education aren’t one-time, but staggered, spread
over years as the fee is paid annually or semi-annually. So, even if the full corpus isn’t saved by the first
year of graduation, you still have more years to save for the 2nd, 3rd and 4th year fees. Post Graduation’s 1st
and 2nd year fee requirements come much later.
(2)You can even start with 100 per cent equity allocation in the initial years if your risk appetite permits. After
a few years of accumulation, debt can be introduced at the time of periodic rebalancing.
(3)Your income won’t remain constant during these 10-20 years. So, increase the savings amount every few years.

It’s obvious from the table above that the one who starts early needs to save a lower amount every month. The later you start, the more you need to save. Another problem with starting late is that you cannot be certain of the returns you will get due to the short time horizon. So, that is an added risk. If you start early, the returns more or less average out over such long periods of time.

If unfortunately, you are very late and just have a few years (five or less) for saving, then a high-debt low-equity portfolio is advisable. Such an allocation would mean that you need to save more every month, but that is the cost of starting late.

And if the savings aren’t enough, then you will either make the mistake of dipping into your retirement savings or be prudent and take the education loan route. To say it directly, do not avoid making your child take the education loan (which he/she will repay) at the cost of your retirement savings. Also, between now and the goal day, it’s absolutely necessary to do a periodic review and rebalance. Ensure that the investments are delivering returns at least in line with your assumptions. If not, take corrective actions.

There is another point to note.

You saving every month for children’s education - doesn’t mean your responsibility is over! What if you die tomorrow? Your savings wouldn’t be enough for their higher education and you won’t be there to earn/save more.

So, buy a large life insurance cover (term plan) that provides enough money not only for their higher education but also for regular household expenses (if you were the sole-earner), children’s remaining school expenses and other goals (such as house purchase, loan closure and medical contingency)