By Manalee Verneker, (CFPCM)
Many of us struggle to plan our goals when they are too far away, and it is understandable. The illusion that we always have enough time gives us a false sense of security. Planning and investing in long-term goals can trigger similar experiences, and one such goal is planning for your children’s education.
With the increase in the cost of education in India and around the world, the dynamics of children’s education planning have completely changed. Parents have to set aside far more money for their children’s education than they did a few years ago. As a result, planning investments towards this goal has become more significant than before.
Child education planning has become an important component. Before you embark on the journey of planning for your child’s future, there are some mistakes to avoid:
1. Don’t Delay Child Education Planning
It’s okay to start small, but start early. Ideally, it is recommended to start when your child is born so that you have plenty of time to achieve your goal. The sooner you start, the more you will save, and the more you save, the faster you can accomplish your goal. This is called the power of compounding. For example, if a child is currently 3 years old and you plan to save Rs. 60 lakhs when the child turns 18, you only need to save Rs. 12,000 a month to reach your goal. Your Principal cost of investment would be Rs. 21.60 lakhs but due to the magic of the power of compounding your portfolio value would reach close to Rs. 60 lakhs. Considering your investments earning 12% compounded yearly. That is why starting early is important when it comes to planning your child’s educational goal.
2. Not Taking Inflation into Account
Funding for higher education is a crucial financial goal. But most investors have a habit of picking up a random round figure as the target. Take a clue from the cost of the inflation index. The amount you are aiming at should factor in inflation and the future costs of education. Higher education is becoming more expensive with each passing year.
An investor needs to find out the current costs of college or course fees, inflate them by a real number and get an estimate of the target corpus. Before you start putting money away, do the math and research on what is the target corpus you need to achieve and what amount you need to put aside to achieve your goal.
3. Don’t Be Too Conservative
Some investors are very reluctant to take risks. This may have nothing to do with their risk tolerance.
When you have a longer tenure to plan for your child’s education goal your risk reduces as you have more time in hand to compound and grow your wealth. Hence investing in the right investment avenue is very important. You can consider Equity Mutual Funds as an option rather than investing in traditional forms of investments offering lesser interest rates.
4. Don’t Have To Do It On Your Own
The latest craze is “Do It Yourself” financial planning and investing. We believe everyone can invest without professional help. If you have a good knowledge of financial planning and investing in mutual funds, you may be able to do this. But even if you know enough, it can be difficult to dedicate enough time to practice. In such cases, do not hesitate to consult your mutual fund advisor or financial planner. Try to educate yourself on how to deal with advisors and planners – clear your doubts with their advice. This will help you to ensure that the advisor is not taking you for a ride.
5. Compromising On Your Retirement Plan
Life is about setting priorities. It is not worth planning an overly expensive education if it will affect your financial independence. Saving 1 million rupees for your education abroad can save you a lot of money on loans over the years. Don’t do it if it means you have to pay off the debt or have to be financially dependent on your child for the rest of your life. Look for other cheaper alternatives. Before considering your child’s educational needs, it is very important to ensure financial independence first.
Children’s education is a non-negotiable goal for most parents and can often be the single largest cash outflow. Hence, building the fund for your child’s higher education, whether in India or abroad, definitely needs planning and good financial expertise.
About the Author:
Manalee Verneker is the founder of Financial Wisdom, a privately established financial services firm based in Goa, India. Financial Wisdom was founded by her in 2021, after just less than a decade of experience in the field of personal finance.
She is a Certified Financial Planner (CFP CM ) from Financial Planning Standard Board India and Chartered Wealth Manager (CWM) from the American Academy of Financial Management. Her experience includes working in Mutual Fund Companies, Wealth Management and Financial Planning Companies and she has a good understanding of both Indian and International markets and products.
She is passionate about personal finance management, and financial literacy and is a strong advocate for financial advice that focuses solely on the individuals.
She can be contacted on:
Email: [email protected]