How to plan for your child’s education and marriage

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?)

The comprehensive child planner published earlier allows you to do just this for two children.  Alternatively, you can use the financial plan creator.

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.

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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.

12. Review

Reviewing is more important for a child's education or marriage goal than retirement (can you guess why?)

Read moreWarning! A long-term financial goal will soon become a short-term financial goal!

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.

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31 thoughts on “How to plan for your child’s education and marriage

  1. shaji

    Nice article sir. I think 60;40 allocation too conservative. i think it should be 80:20 what do say sir. Along with the allocation please mention the debt portfolio apart from PPF. Since i'm maintaining NRI status cannot open PPF a/c.

    Ragards
    Shaji unni

    Reply
    1. pattu

      Thank you. If you have 80:20, you will need to manage the folio actively and it will be too volatile. For you, debt can be a tax free NRE fixed deposit.

      Reply
  2. shaji

    Nice article sir. I think 60;40 allocation too conservative. i think it should be 80:20 what do say sir. Along with the allocation please mention the debt portfolio apart from PPF. Since i'm maintaining NRI status cannot open PPF a/c.

    Ragards
    Shaji unni

    Reply
    1. pattu

      Thank you. If you have 80:20, you will need to manage the folio actively and it will be too volatile. For you, debt can be a tax free NRE fixed deposit.

      Reply
  3. Anonymous

    There is only one thing I (possibly) don't agree with. While I understand one should diversify, however over something like a 15 year perioud an equity mutual fund would definitely give you a better return than a debt mutual fund. So for such a long period, I think one could do by just investing in an equity mutual fund for ones child.

    I myself have done both though, bought some 20 year tax free bonds in her name and also invested in equity mutual fund sips.

    I think one should also mention in the article that any income earned by the child above Rs. 1500 is clubbed with the parents taxable income so it is best to invest in something that does not give immediate taxable returns.

    Reply
    1. pattu

      Every portfolio, no matter how far the goal is, would need a debt component. A 60:40 equity:debt allocation is all you need to attain most financial goals. Agree about not investing in child's name. Thanks.

      Reply
  4. Anonymous

    There is only one thing I (possibly) don't agree with. While I understand one should diversify, however over something like a 15 year perioud an equity mutual fund would definitely give you a better return than a debt mutual fund. So for such a long period, I think one could do by just investing in an equity mutual fund for ones child.

    I myself have done both though, bought some 20 year tax free bonds in her name and also invested in equity mutual fund sips.

    I think one should also mention in the article that any income earned by the child above Rs. 1500 is clubbed with the parents taxable income so it is best to invest in something that does not give immediate taxable returns.

    Reply
    1. pattu

      Every portfolio, no matter how far the goal is, would need a debt component. A 60:40 equity:debt allocation is all you need to attain most financial goals. Agree about not investing in child's name. Thanks.

      Reply
  5. Alok

    Sir,
    You had promised me to provide a back testing of equity vis a vis gold dynamic asset allocation chart. I have made a formula of my own but can not do back testing myself. I feel gold- equity asset allocation is better then debt- equity dynamic asset allocation. Please share your views.

    Reply
    1. pattu

      Alok, I will try and do this soon. As I have written earlier, gold is too volatile and a portfolio requires debt to balance it with or without gold.

      Reply
  6. Alok

    Sir,
    You had promised me to provide a back testing of equity vis a vis gold dynamic asset allocation chart. I have made a formula of my own but can not do back testing myself. I feel gold- equity asset allocation is better then debt- equity dynamic asset allocation. Please share your views.

    Reply
    1. pattu

      Alok, I will try and do this soon. As I have written earlier, gold is too volatile and a portfolio requires debt to balance it with or without gold.

      Reply
  7. shaji unni

    Dear Pattu Sir,
    Continution of my earlier query you have suggested me NRI fixed deposit for a debt part. Can u pls tell me how we can rebalance the portfolio if ur fixed is for longer duration. Im still cofused which debt product to use. My goals are only two. Sons education and retirement both are 17 years away. Can pls suggest debt product for both the goals?.

    Reply
  8. shaji unni

    Dear Pattu Sir,
    Continution of my earlier query you have suggested me NRI fixed deposit for a debt part. Can u pls tell me how we can rebalance the portfolio if ur fixed is for longer duration. Im still cofused which debt product to use. My goals are only two. Sons education and retirement both are 17 years away. Can pls suggest debt product for both the goals?.

    Reply
  9. Pattabiraman Murari

    Every portfolio, no matter how far the goal is, would need a debt component. A 60:40 equity:debt allocation is all you need to attain most financial goals. Agree about not investing in child’s name. Thanks.

    Reply
  10. Pattabiraman Murari

    Every portfolio, no matter how far the goal is, would need a debt component. A 60:40 equity:debt allocation is all you need to attain most financial goals. Agree about not investing in child’s name. Thanks.

    Reply
  11. lakshminarasimman

    sir

    we can make it clear to the children during +1 +2 itself that our obligation moneywise is only till their undergraduate degree and no further. x is the budget for their undergraduate degree and anything beyond or otherwise they have to fund or get scholarship on their own

    if it is a boy, you can also make it clear when he starts earning until and unless he can sponsor his own marriage, he is not worthy of getting married at all.

    for a girl child, you can relax the rule regarding marriage.

    Reply

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