Steps to Plan for your Child’s Future
Financial planning for the child’s future has become an indispensable part of financial planning. Earlier, public education took care of the educational needs. Times have changed and getting quality education requires a lot of money. Starting from kindergarten to postgraduate degree, getting the right education is a costly affair and it is going to increase in the future. So, instead of making ad-hoc financial investments, have a financial plan in place for your child’s future.
Financial planning for children is not just limited for people with kids but it will also help couples and singles who want to have children in the future.
Planning for children’s future as early as possible will help you to plan for their education and marriage easily and reap the benefits of the power of compounding.
To carry out financial planning for your kid’s future, it is important to note the different stages that require financial planning.
Before the kid enters formal education: Expenses related to a kid starts before the kid joins the formal education system. The medical expenses such as hospital bills and vaccination are some of the costs that parents have to incur.
School admissions: School admissions are no longer the same. Admission in a reputed international school requires a lot of money in the form of donations, school fees, tuition fees, books, co-curricular activities etc.
Higher education: The cost of quality higher education is rising at a faster pace. Education inflation is higher than overall inflation in the economy. Financial planning for college education is not limited to tuition fees. The cost of living in a different city including hostel fees, rent, food and transportation cost also needs to be considered.
Child Marriage: Your child’s marriage is another area that requires financial planning.
Now, that you are aware of the ‘whys’, let's shift our focus to the ‘hows’.
The first step is to find out the current cost of the course at the institution
Second, add the rate of inflation to the present cost. Rather than taking the inflation rate of the economy or education inflation, it will help to figure out the rate of inflation in the field of their choice. You can use a future value calculator available online to arrive at the future cost of your goal.
The overall education inflation is considered to be around 10-12%. E.g., if the current cost of a course is Rs. 15 lakhs, the course may cost approximately Rs.1 crore after 20 years with 10% rate of inflation.
The third step is to consider the time horizon i.e. knowing when you will need the money. For e.g., if you recently became a parent, your kid’s school admission may be a short term goal and their marriage plan is most likely to be a long-term goal.
The fourth step is to invest according to the time horizon of these goals. Different saving and investing options can help to fulfil your goals. Mutual funds are one such financial instrument can help you to plan for your children’s future goals.
For short-term goals with a time horizon of one year to three years, parents can invest in short term debt mutual funds. These funds invest in debt instruments that aim to protect your capital and give higher returns than traditional instruments such as fixed deposits. Hybrid funds can help to plan for your medium-term goals with a time horizon of around five years. Equity funds such as large cap funds make the best option for long-term goals.
Systematic Investment Plan (SIP) is a facility through which you can invest a certain sum of money every month in a mutual fund of our choice. Investors can also increase their SIP amount and make one time or lump sum investments that will aid in reaching their goals faster.
To gain clarity or to know how to plane for your child’s future, you can take help from a financial advisor.
Conclusion: With the rising cost, planning for a child’s future has become an important part of financial planning. Money should not come in between your child’s goals and proper planning will ensure that they have the luxury to opt for the college and course of their choice. So, give your child the opportunity to spread their wings and fly. A financial advisor can help to make it a reality. Get in touch with your financial advisor today.