Here is a step-by-step guide to plan for your child’s education and marriage.
1. When to start planning. The moment the pregnancy is confirmed!
2. What do to first? Evaluate your insurance cover and buy more if required.
3. How to evaluate insurance cover? Let us consider a couple with a two year old child. The male is the sole breadwinner. What would happen if he were to die today?
The wife will have to
- manage everyday expenses
- pay the child’s school fee, tuition fee and associated expenses
- source money for the child's college education and perhaps also marriage
The insurance cover must be large enough to handle all of the above.
- One part of the insurance cover will have to be used for generating an inflation-protected income
- One part should provide for school education taking into account inflation
- One part should be invested for college education and marriage (this is related to pt 4 below)
Therefore, in addition to the insurance cover, an implementation plan must be discussed with the spouse and a close family member (why?)
4. What next? The next step is to recognise the college education costs a lot! The corpus you save up could pretty much determine where and what your child studies. So you will need think about what it would cost to get your child a college degree (UG + PG) today. Please talk to parents whose children are in college. It is not at all hard to find a few.
5. Inflation. A minimum value of 10% inflation should be used to estimate the future cost of education. That is how much college education would cost when your child is ready for it. The 10% inflation is a low figure! However, not many will be able to invest enough if 12% or 15% inflation is considered.
College fees do not increase each year. Every few years or so there would be a big jump. Sometimes the fee could even double. Such a jump could happen when you child is about to enter college!
We can’t plan for such an event, but we certainly can start early, invest enough and aggressively.
6. How much? The first step is to determine how much to invest. The above-mentioned child planner can help you with this.
Be sure to increase the monthly investment each year. The calculator allows you to play with this option.
The corpus created for the education will not get spent in one shot. Some amount is required for the UG education and some for the PG degree. So the corpus would typically get spent over 4-6 years.
If you wish to consider this, you can use the staggered goal calculator.
7. Where NOT to invest?
- Any product with the word ‘child’ in it! Be it a ULIP or traditional insurance policy or mutual fund. All of them are complicated products
- Any product which locks up money or matures when you child turns 18. This is a dumb thing to do. Most children finish school before their 18th birthday!*
- PPF! If your child is already 4/5 years old, it may not mature in time. Of course, the money can be
- Gold! If you want physical gold for their marriage, buy it. Do not invest in a gold ETF or gold fund. Read more: Do not buy Gold ETFs because you need gold for your child’s marriage!
* This post was written on Aug 8 2014 well before the advent of Sukanya Smriti Yojana. Always believed ill-liquid schemes are unsuitable. Read more: Sukanya Samriddhi Yojana vs PPF: An Illustration
8. Where to invest? Finally!
- If you begin early, that is immediately after you child is born or earlier, you can have a 60:40 equity:debt allocation.
- If you begin when you child is 3 or 4 years old, there is only 12 years before school graduation. So you could opt for 30-40% equity and rest in debt.
- Equity/debt mutual funds are the best tools for such this purpose. Direct equity is too risky for this goal in my view.
- If you have begun early there is no need to max the PPF investment. Invest as per asset allocation.
- If the allocation gets skewed because of a bull run, shift gains to PPF.
9. Why invest for his/her marriage? Can’t he/she not handle it? Perhaps, perhaps not. The main aim to ensure our retirement nest egg is not affected by their marriage. Read more: Should I invest for my child’s marriage?
Similarly, (I believe) it is important to ensure our children do not start their career burdened with debt (education loan). Hence, we will have start early, invest right, and manage the portfolio right.
10. What if you cannot save enough? Invest what you can. Focus on retirement planning. Get an education loan for your child but be sure to get them a term insurance plan for the loan amount with you and your spouse as the nominee.
11. Shifting baseline What a child wants to study after school will become clear only when he/she gets to the 9th or 10th standard or later. So the corpus required will keep changing. Where the child actually ends up studying could be very different from everybody's wishes/expectations. Not much can be done about this. That is the way the cookie crumbles sometimes.
Reviewing is more important for a child's education or marriage goal than retirement (can you guess why?)
I prefer to look at the net portfolio return and what the actual worth of the portfolio is.
I strongly believe that each goal has its own risk profile and therefore have kept my retirement, sons education and sons marriage goal portfolios separately.