Five rules for planning your child’s future

You need to have a clear cut plan about how to send your child to college and more importantly you need to plan and provide for the same. Here are five basic rules that will help you to plan and finance your child’s higher education.

Jun 01, 2018 06:06 IST India Infoline News Service

Your child is just three years old but you are already worried about how you will manage college funding for your child. If you are already worried, then you are on the right track. But worrying alone will not help. You need to have a clear cut plan about how to send your child to college and more importantly you need to plan and provide for the same. Here are five basic rules that will help you to plan and finance your child’s higher education.


Make child’s future a part of your financial plan

Your financial planning typically starts off with your goals in mind. At the very outset, make an estimate of when your child will go to college and plan backwards accordingly. A college education costs big money today. A quality graduation degree in India can set you back by Rs50 lakh and a post graduation qualification will cost you an equivalent amount. These are at current prices, so you need to first extrapolate how much the education will cost 12-15 years down the line. Once you arrive at a benchmark figure, work backwards. But, more importantly ensure that your child’s financial plan is made a key goal in your financial plan with clear financial commitments and milestones.

Leverage the power of equities to reach your goal

If you want to generate a corpus for your child’s education 15 years down the line, then you cannot leave the money in a bank FD. That is not a productive way of using your money. Ideally, go for equity funds as they will enhance your wealth over the longer time frame. Fifteen years is long enough for equities to create wealth with manageable downside risk. The key is to focus on equities and adopt a systematic investment planning (SIP) approach. Here is why equity funds for your child’s future planning makes a lot of sense:

My child needs a corpus of Rs1 crore after 15 years for higher education

Product

Liquid Funds

Debt Funds

Balanced Funds

Equity Funds

CAGR Yield (%)

6%

8%

11%

14%

Monthly SIP

Rs34,685

Rs29,431

Rs22,880

Rs17,693

It is clear that you have to take the equity funds route and invest in these funds. That way you can reach a corpus of Rs1 crore in 15 years by saving Rs17,693 per month in an equity fund that can conservatively generate 14% annualized returns. Make equities and time work in your favour.


The earlier you start planning, the better it is

The biggest rule when it comes to planning for your child’s future is to start as early as possible. Ideally, you should start immediately after your child is born so that you can really make time work in your favour. Consider the table below:

How to reach a target of Rs.1 crore when your child is 18 with Equity Funds

SIP Tenure

18 years

15 years

12 years

8 years

Yield

14%

14%

14%

14%

SIP required

Rs11,341

Rs17,693

Rs28,444

Rs58,619


 
As is evident from the above table, the earlier you start, the lesser you are required to save to reach your eventual target of Rs1cr. The key is to make time work in your favour.

Build insurance into the child plan

The entire SIP idea is good if you start early and invest through equities. You are likely to comfortably provide for your child’s college education. But what if, God forbid, something was to happen to you. You must build insurance into the plan in such a way that the child’s education plan is not impacted. There are two ways to do it. There are children plan funds that will automatically build insurance into your plan. Alternatively, you can have a term policy for an equivalent amount so that in any eventuality the term insurance corpus will pay for the SIP required to send your child to college. 

Review and monitor the plan regularly

Creating the plan and leaving it on auto mode is not enough. You need to review the child plan at least once a year to ensure that it is on target. Have college costs gone up more than anticipated? Is your investment accumulation on track to achieve the goal? How to intersperse an additional child plan for your second child? These are some of the questions you need to answer through constant monitoring and review of the child plan.

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