Lack of funds for your children’s higher education can hurt their dreams. This could happen for both domestic as well as international education. In this article, we discuss why it’s so important to save for your children’s goals and present some factors that parents should consider while saving for an education corpus.
Do not ignore education inflation
In many countries around the world, the rate of education inflation is much higher than the rate of household inflation – almost double in some popular education destinations. Often, when parents plan for their children’s future education, the corpus amounts they have in mind are the tuition rates and living expenses of today.
This rationale often becomes a reason for their child to make painful adjustments later because it doesn’t take into account that tuition fees increase year on year. In countries such as the United States, for example, education inflation has stood around 4.4 percent a year, over the last 20 years! Instead, a better strategy is to adjust for education inflation. You can find education cost calculators to help you in this process. It is best to use a calculator that accounts for a comprehensive list of factors, including the study destination, the field of study, accommodation fees and more.
Start early
It’s easy to say, “I’ll plan later.” Ultimately, days turn into weeks and weeks turn into months.
And, before you know it your child will be planning their future career. If you let time slip through your hands without financially planning, watching your child grow up so quickly won’t be the only surprise you have. Rather, the cost of their future dreams might be a rude wake up call.
How exactly should a parent plan early then? Starting an investment portfolio dedicated to this goal can have long-term benefits, especially if these are investments in equity-based asset classes. With the right amount of time, these investments can compound and yield sizable returns. Starting early does not necessarily mean beginning with large amounts at once – even a small amount can go a long way over time. The idea is to start soon and be disciplined with your investments.
Is it enough if just one partner contributes?
Having both spouses contribute to their child’s education corpus can define how quickly this goal is achieved. If both parents contribute a part of their salary each month, this amount can compound on a larger scale. It is possible that the parents may reach their target goal earlier, or in the best-case scenario over-save. Conversely, parents who have many liabilities can think of smaller amounts. In either case, partners tend to be more responsible when it isn’t an individual goal but a team goal that they’re pursuing – the consistency and motivation levels remain high.
Diversify your education corpus
It is a general tendency among Indian households to invest in FDs, gold, and real estate for the purpose of their child’s education. While these asset classes have been reliable because of their stability, they can be lumpy and illiquid. Unlike education, which is a defined event, selling land or property is not-- there is no guarantee how long it will take to sell, and at what price. In recent months, some FDs are unable to beat the rate of household inflation.
For investment horizons longer than 10 years, it's important to diversify one's investments. Equity markets in both India and the US can help provide significant returns over time. If parents are especially set on sending their children abroad, dollar investments can help provide a hedge against the rupee. If the rupee continues to depreciate against the dollar, a parent can end up spending more money because it has less purchasing power for a tuition bill in dollars or pounds. Diversifying one’s investments into foreign stocks can help a parent earn in dollars and spend in it, too.
Find yourself the right platform to save
There are three things to narrow down on a platform while investing for your child.
One, is the platform helping you set the right goals that account for the rising costs of education? Many goal-based investment platforms arbitrarily look at your risk, and time horizon. However, when saving for a goal such as education that is not enough. Make sure the platform you’re using helps you consider inflation, accommodation fees, and the cost of living.
Two, does the platform allow you the option of selecting across multiple asset classes? While long term investments in equities can help reach your goal faster, some investors may not have that kind of risk appetite. Or they may want to balance their risk in equities against other asset classes, such as FDs.
Lastly, does the platform offer services to help you think about the entire higher education planning journey of your child. For example, if you fall short of the funds you need to earn through your investments, does the platform help direct you towards the right loan provider? Parallelly, the planning journey is not solely about finances but also academic readiness. It's important to see if there are any added benefits like education counselling or help with the admission process that the platform can provide when your child is ready for it? The potential for students to explore diverse degree opportunities is growing day by day. Also consider how your savings will stack up against the degree your child wants to pursue.
If you’re a parent that wants to help contribute to your child’s education, then take the time to find the right savings platform. Whichever platform that may be, ensure that you’re treating your child’s education corpus as important as other goals you’re saving for.
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