Want to invest right for your child? Do this simple calculation today with your spouse!!

Published: March 9, 2019 at 10:53 am

Last Updated on

It is every parents’ dream and duty to ensure our children can do what they want to in life. It would also be great if our children do not start their earning lives with an educational loan Therefore it is important that we plan and invest right for our child’s future. Here is a simple calculation and a set of tips for this purpose. Please sit with your spouse this weekend and finish this task!

Readers may recall that I had done a similar exercise for retirement planning in two steps: Part one: Find out how much you need to retire in 15 mins: build your own calculator Video version is here(part 1). Part 2 video is here. One may ask which is more important? Planning for a secure retirement or our children’s future. Emotionally this is an easy question to answer: Our children come first!

Especially if we became young parents and can work for at least a decade after they start school. However since couples are becoming parents in their early and mid 30s with tough corporate jobs, both goals become equally important. Unless we sit and calculate how much investment is to be made, we will never take them seriously. That is why it is crucial to do this exercise as a couple.

Want to invest right for your child? Do this simple calculation today with your spouse!!

Step 1: Project current and current class (in school) into the future

Set up the following columns in any spreadsheet software of your choice. It will tel you when exactly you need the money for college. Or how many years you have to invest. Here it is 9 years

Investing for colleges expenses: Project current and current class (in school) into the future

We also add the money available at hand, say Rs. one lakh in previous investments. We also assume you can invest Rs. 5000 a month or Rs. 60,000 a year. Here are assuming the girl will enter class four this coming academic year.

Step 2: Growth of the amount in hand

We assume that the Rs. One lakh in hand grows at about 7% post-tax a year, resuling in about 1.8 lakh after 9 years.

Growth of the amount in hand at 7% a year

Step 3: Growth of future investment amount

This step is crucial. Please try to increase the investment amount by at least 10% a year!

growth of investment amount at 10% a year this is a crucial step in investing for our child's future

Step 4: Computing the value of monthly investments

To do this, we first need to know how much to invest in equity and how to invest in fixed income. We need an asset allocation. Alternatively, we can enter a portfolio return each year as shown below.

expected portfolio return for child future goal each year

This corresponds to about 40% equity initially and 60% fixed income for the first 3 years or so, reduced to 20% equity in the middle three years and 0% equity in the last three years. Where to invest this? I have made product suggestions in the video version linked below.

Step 5: finding the final investment amount

Finding the final investment amount for college expenses

In column G, we compute how the investments made each year grows with the corresponding annual return in column F. In column H, the total final value is shown. The yellow cell is the sum of two orange cells. If you want some help in computing column G, see the vide version.

Step 6: Finding what the projected corpus is worth today

Now we take the value in the yellow cell and devalue it by 10% (assumed inflation in education expenses) year after year to find what the current value of the projected corpus is. To ensure I do it for 9 years, the cell in blue is devalued twice to get the current value.

Finding out what future college expense corpus is worth today at 10% inflation

So this means our future investments are worth about 5 lakh today. If this amount is at least 70-80% of a college education today, then the child will probably not need an educational loan.

Step 7: Choosing the investment products (watch video version)

The advantage of the above calculation is flexibility and a better understanding of what is going on and what has to be done.

Step 8: Projections for a newborn (<1-year-old) conservative

I have made two projections for a newborn with a full 17-18 years of time for investment. Even with a conservative return projection, the corpus is decent.

Projections for a newborn (<1-year-old) conservative

Step 9: Projections for a newborn (<1-year-old) aggressive

This is the same as above with with a more aggressive return expectation (higher equity)

Projections for a newborn (<1-year-old) aggressive

Weekend exercise

  1. Please do these steps with your spouse and let me know if it was useful
  2. What kind of asset allocation would you use for step 8 and 9. Hint: How to reduce risk in an investment portfolio

Explore more videos from freefincal on YouTube

 

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps