Financial Challenges & Planning to Secure Child's Future - [Part 1]
Created by Parentune Support Updated on Nov 14, 2019
Every parent wishes to give the best to their child and one thing that is right at the top of their mind is good quality education. Indian parents truly follow this quote by Benjamin Franklin (one of the founding fathers of the USA) - An investment in knowledge pays the best interest. A good educational qualification leads to a well-paying job for life and helps take care of most of one’s social and material needs – is a time tested the belief that most parents religiously follow. However, this is easier said than done as it is also crucial that you plan in advance (financially as well) for your child’s future. [Know - When Your Child Leaves for Higher Studies]
Parent's Biggest Financial Challenge to Secure Child's Future
Do you know which is the biggest financial challenge that most of the parents are facing regarding their children? The rising cost of education is clearly the biggest challenge. Like everything else, the cost of education is going up every year due to inflation. Inflation is the general rise in prices of goods and services over a period of time (Mehengai in Hindi). Though government institutions (like IITs, IIMs, IISc, etc) are the first choice for higher education in India owing to their quality and brand, the limited number of seats forces a majority of students to study in private institutions where the costs may be higher.
Many parents also want to send their kids abroad for higher studies to impart international exposure. However, this also means higher costs of staying abroad which will not only grow with inflation but also rise if the Indian rupee depreciates (Rupee depreciation explained in next para). Presently studying abroad (USA, UK or Australia) may set you back by USD 20,000 - 25,000 per year in tuition fees and USD 10,000 - 20,000 in cost of living, depending on the country you have chosen. Thus the total cost may exceed USD 35,000 per year which would mean over Rs.20 lakhs (assuming 1 USD = Rs.60) for a single year. (Source: HSBC)
Rupee depreciation explained – If 1 US Dollar = Rs.60 today and becomes 1 US Dollar = Rs.75 after 5 years, the cost of education even if unchanged in US dollars at USD 35,000 would increase from Rs.21 lakhs (35000x60) to about Rs.26 lakhs (35000x75) in rupee terms. This is because one needs to count more rupees for every dollar spent. In other words, this means that the rupee has depreciated or the US dollar has appreciated (or become stronger).
How The Future Cost of Education Can Be Calculated?
Let us assume that you have a 10-year old daughter for whom you want to plan and save for an MBA degree when she is 22. If the current fees for this course are assumed as Rs 10 lakh for a 2-year course, by the time she is 22 the same course will cost you Rs 25.18 lakh (assuming costs rise by 8 percent per year which is also called inflation rate) – more than 2.5 times today’s cost. This is similar to comparing the cost of education when parents were themselves in school and now when their kids are in school. This cost difference is mainly because of inflation. Looking at the large sums that need to be paid as fees when your kid grows up, you would certainly need to plan much in advance to meet these goals.
How Can You Plan to Meet These Challenges Smoothly?
Looking at the future costs, it is truly difficult to save these sums as your child grows. However, it is not impossible if planned well. The most important thing to do is to start saving as early as possible, maybe from your child’s birth itself. The key ingredients of the plan include -
#1. Set Goals
The first and foremost step is to list out your goals for your child which may mainly include education (high school, college, higher studies), marriage, among others.
#2. Start Early
As we have seen, you may need a lot of money to fund your kid’s education. The good part is that you can start well in advance and plan systematically for this goal since you know how many years you can save to meet that goal. The earlier you start the more manageable is the goal since you need to save a smaller amount every month than if you start late. For example, say you need Rs.10,000 after 10 years, you may either save Rs.1000 every year for 10 years or save Rs.2000 every year for 5 years (interest not included). In other words, you need to save more if you start late (Rs.2000) and save less if you start early (Rs.1000). Hence saving small amounts regularly every month from the time your child is born can help you meet your goals much easily.
#3. How Much to Save?
It is generally observed that most people save in a common pool and withdraw from this pool for any goal. In such a scenario, there is a high chance that savings may dry up early with little left for retirement. Hence it is very important to save separately for each goal like saying ‘this investment is for education’, ‘this investment is for buying a house’, ‘this investment is for our retirement’, etc.
For this, the first and foremost step is to know how much to save. One has to, therefore, know the cost of the goal today, then estimate the cost of this goal in the future based on inflation and invest accordingly. You can also invest more as your income goes up. If the goal is more than 5 years away you may look at investing in equity mutual funds. If the goal is less than 5 years away you may look at investing in debt mutual funds.
……….to be continued - [Part 2 - Are You Planning Right for the Child’s Future?]
Disclaimer: An investor education and awareness initiative by Franklin Templeton Mutual Fund. Franklin Templeton Mutual Fund has provided inputs to this article as a part of it investor education and awareness initiative. This article is dated November 4, 2014. Information contained in this article is not a complete representation of every material fact and is for informational purposes only. Regulatory/ taxation details are provided on a best effort basis and are as per the existing laws and subject to change from time to time. The recipient is advised to consult an advisor/ tax consultant prior to arriving at any investment decision.
**Mutual fund investments are subject to market risks, read all scheme related documents carefully**.
| Aug 31, 2021
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