How to plan finances for your child’s education?
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Saving is the most important criteria for any individual. Some save money for their retirement, some for a new car or a house, some for vacations and likewise. Reasons for saving money differ from person to person as per their objectives.
Nowadays, people are becoming more concerned about their child’s future and they should be because of the rapidly increasing tuition fees of schools and colleges. So, if you want to be hassle free in the future, then it is better to start planning and saving to make the future of your children secure.
The cost of higher education is increasing at a high rate, hence, if you don’t you’re your child’s education finances well, you could fall way short of the required corpus when your child is ready for college. Moreover, for engineering and medical aspirants, the cost starts even while the student is in high school.
Coaching institutes also charge hefty fees for preparing the students for the entrance exams. This sharp spike in fees is a wake-up call for parents saving for the higher education of their children. Higher education costs have the highest inflation rates in the country. Hence, parents need to realise that it is going to be an expensive affair.
Assessing your child’s future needs:
First and the foremost thing you should consider and evaluate the needs of your children before preparing any financial plan. After evaluating this, start chasing those needs-based objectives. There can be some expenses which may arise in future so you should forecast them as well.
Starting to save more early and investing less:
The benefits of an early start cannot be stressed enough when you are saving for a long-term goal. If your child is 3-4 years old, you have 13-14 years to save hence you can take some risk and invest in equities as in long term equities give higher returns.
You can start Systematic Investment Plans (SIPs) in equity funds. Starting early helps you accumulate larger sums that may not be possible later in life. The multiplier effect in the power of compounding comes from the investing time horizon; longer time horizons have a higher multiplier effect.
Starting early also put the lesser burden on your finances because it requires a smaller outflow. Also, you may not be able to invest in certain assets if the time horizon is too short. Delay in investing the same will not only make you invest a higher amount every month, but it will also reduce your ability to take risks.
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Only saving could also be a risk, if you want high returns:
If you want to earn high returns than saving money in your savings bank account is not the option. You should consider various investment options available in the market and choose the best suited to make your portfolio progress towards the financial goals you have set. The ideal asset mix at this stage is 50% in stocks and 50% in debt. It is better to go for balanced funds instead of equity funds that invest in a mix of stocks and bonds.
If your risk appetite is lower, monthly income plans (MIPs) from mutual funds can be a good alternative. These funds invest only 15-20% of their corpus in equities and are therefore less volatile than equity or balanced funds. However, the returns are also lower than those of equity funds. However, remember that returns from equity and balanced funds are tax-free after a year, while the gains from MIPs are taxed at 20% after indexation benefit.
For debt portion, start recurring deposits (RDs) that would mature around the time your child is scheduled to apply for college. It is also important to review the progress of your investment plan. You should check every year if you need to step up your contribution towards the higher education kitty.
For teenaged children, the investment strategy should focus on capital protection. With the goal barely 1-4 years away, you cannot afford to take risks with the money accumulated for your child’s education. The equity exposure at this stage should not be more than 10-15%. As you come closer to your target, one should stop SIPs in equity funds and shift to a short-term debt fund. This is because a sudden downturn in equity markets can reduce your corpus and upset your plans.
Help from an expert financial planner:
Apart from the child’s future, there are other priorities as well like retirement, medical expenses, housing rent, etc. You should never dip into the funds save for these priorities to invest for your child. Planning better would be sensible and for that you can take help from an expert financial planner.
When saving for your child’s education, it is important to know that the whole financial plan depends on regular contributions by you. But what if something unfortunate happens to you? The entire plan crashes. The only way to protect against this is by taking adequate life insurance. And term insurance plan even doesn’t cost too much. And that is too small a price for something that safeguards your biggest dream.
You can easily make the future of your children secure, by following the steps mentioned above. Invest smartly!