How I Helped a Young Nuclear Family Invest For Their Children’s Future

How I Helped a Young Nuclear Family Start Investing for Financial Freedom

Published: October 8, 2019 at 9:00 am

Last Updated on

When a couple has children, securing their future is a top priority. In this article, SEBI Registered Investment Advisor Preeti Zende discusses the case of a couple, Venkatesh and Latha who desire financial freedom but will have to secure the future of their two children first. She explains in detail how a family can plan for their children’s needs. If you wondered what a fee-only planner does, then this example should help.

 

Preeti Zende is a SEBI Registered Investment Advisor (RIA) (Licence No: INA000012777) and Fee-only Financial PlannerPreeti Zende is a SEBI Registered Investment Advisor (RIA)  and Fee-only Financial Planner based in Navi Mumbai India. She is a member of Fee-only India (FOI). She is an owner and founder of Apanadhan Financial Services.

She is an Associate of Insurance Institute of India (AII) and has a post-graduate Diploma in Business Finance from ICFAI university. She also holds a Masters’s degree in Commerce from Pune University.

Preeti was associated with the Insurance and Finance industry for long and having experience in both administration and marketing of Financial products. She had worked as a Medical and Nonmedical Underwriter and was heading a Quality check team in Reliance Life Insurance Company. She also worked with ICICI Prudential Life Insurance Company’s sales and marketing team. You can contact her via her website, Apanadhan.

Note: Different parents have different goals. Some want to support children up to post-graduation and beyond (mine did!). Some would like to use a loan for higher education. Some are particular about accounting for marriage expenses. Some prefer their kids to handle that. It is not productive to comment on what is right and what is wrong. What is shown is a typical example. Your needs/wants are likely to be different. Names and particulars have been modified below to protect privacy. Now over to Preeti.

Venkatesh represents today’s promising Indian youth. After completing his academics with decent ranks, he joined an MNC on a good salary. Like every Indian household, Venkatesh was told by his parents and relatives that to be wealthy, he had to study hard and get a job. Is getting a job, the solution for all financial problems? We find several unhappy working or business professionals who are finding it difficult to cope up with uncertainties and demanding lifestyle. Rising costs add up to their worries.

Many of Venkatesh’s friends and colleagues are quite frustrated with their situation despite having a reasonable and regular income. What differentiated Venkatesh from the masses is his attention to financial independence and his approach and thought process about Personal Finance. He reads lots about personal Finance and its concepts and tries to understand those thoroughly and implement those personally. Despite his knowledge of personal finance, he could not apply those concepts in his real life. According to him, his current financial situation was good, but he felt something was missing. Due to his hectic work schedule, he could not give proper attention to his finances. He approached me to review his present financial state and strategy to achieve his life goals and to gain financial freedom.

I am sharing here the advice extended to Venkatesh. If you are facing some of the obstacles he and his friends faced, hopefully, this may be of some help. In the introductory call with Venkatesh, I found out that he was happily married, in his mid-30s with two adorable kids: seven-year-old son, Sai and daughter Anu who is four. His wife Latha was also working and draws a decent salary. Like many of us, they were aiming at financial freedom by saving and randomly investing based on tips he received from his friends. They both were investing their monthly surplus in different financial assets but was not aware of the exact purpose of those investments.

The first step in financial planning is to find the answers to these essential questions

  • Why invest?- Identifying the goals
  • Where to invest?- Identifying the best financial instruments
  • How much to invest? – The amount required to be invested regularly.

Financial Goals

Ventakesh and Latha had to identify their financial goals first. What are financial goals?  These goals are targets, usually driven by specific future financial needs. What could be the financial goals of a middle-class Indian family of 4 or 6? It could be comfortable retirement, having own house, kids’ education and respective marriage(s), domestic and foreign vacations, and buying or upgrading a car. These goals can be segregated in short, medium- and long-term financial goals according to their time frame.

In this financial planning exercise, Venkatesh and Latha found that their long-term goals were planning for their retirement and kids’ education and marriage. They had already bought their own house and had a car. Because of decent savings, they could manage their short-term goals of vacations too. But retirement and kids future planning were bothering them. They also realised that they were not having an adequate emergency fund.

I advised Venkatesh and Latha on arriving at short term goals and long-term goals. While I had an elaborate conversation with them on all their goals, for illustration purpose, I am only sharing details about kids’ education & marriage planning. This is a critical long term goal for a couple aiming for financial freedom.

Being a parent is the most important responsibility in the world, and their education and marriage goals have to be accounted for, before considering financial freedom. This will ensure there are no shocks later on in life, resulting in preventable withdrawals from the retirement corpus.

 Kids are our lifeline. They pour eternal and selfless love on parents. Once a parent always a parent. That is so true. We constantly think of the welfare of our kids. Apart from providing security, good teaching (Sanskaar) and values and fulfilment of their essential needs, parents have to provide monetary help to their kids until they become Independent earner.

Vekatesh and Latha thought alike. They both emphasized on this goal and wanted to be future ready for their kids. 

Kids’ education: You all must have seen the WhatsApp forward where before childbirth itself admission in IIT coaching is being planned. Jokes apart, this is the reality in India. Parents are under tremendous pressure to accumulate a corpus for their kids’ education purpose. India experiences the highest inflation rate in education every year. So, while calculating the required corpus for kids education, inflation should be considered at 8 to 11% every year and according arrive at the Corpus. This may look exaggerated, but this is the sad reality.

Do remember that the fee may be stagnant for a few years and suddenly it may increase (just when your kids apply for admission!). The fee structure in India does not increase every year for higher studies. There may be some exceptions, though.

This goal is not only long term but is a recurring goal too. Parents need money every year for fees and tuition classes as well as extra-curricular activities. So, planning of Kids’ education should be done likewise. This goal can be divided as

Recurring expenses of school fees, extra-curricular activities and tuition classes: These expenses parents have to incur every year. Mostly now the school, as well as tuition classes, take half-yearly or yearly fees. In Ventakesh’s case too,  they have to pay half-yearly school fees for both of his kids and quarterly payments for extracurricular activities.

Long term education goal has two parts

  • corpus required for kids’ graduation and
  • corpus required for post-graduation studies

Venkatesh and Latha aspired to support for his both kids’ graduation and post-graduation expenses and agreed to include this in their long-term plan.

Kids Marriage: Indian families prefer a big fat wedding. They give equal importance to this goal too. In Venkatesh’s case to they were keen to have sufficient amount ready for both their kids’ marriages.  So, this first step of identifying Venkatesh and Latha’s life goals was done, more precisely for kids’ education and marriage planning.

Corpus required to achieve these goals: Once goals are identified next step is to decide how much corpus is required for each goal and for each child. In the conservation, I came to know that Ventakesh and his wife Latha feel Sai would like to be an Engineer and Anu a Doctor. Accordingly, they need to plan for their graduation and post-graduation expenses. I asked them to pen down how much they thought these courses were costing then and importantly, how much they could afford.  Gathering these inputs this is how I arrived at the future cost of these long-term goals.

Plan for Sai’s graduation expenses

Inputs I received from Venkatesh and Latha: Sai is currently seven years old.  Time for his graduation first year 11 yrs. The current average cost of 4 years engineering course is ₹   30,00,000.

SAI’ GRADUATION EXPENSES
ComponentsAmount
Time Horizon 11 Years
Current Cost of the Goal ₹ 3,000,000
Rate of Inflation Assumed10%
Future Cost with Inflation ₹ 8,559,350
Current investment-linked towards the goal0
Expected Returns from Equity10%
Expected Returns from Debt6%
Avg. Portfolio Return Assumed8.4%
The annual increase in total monthly investment %5%
Suggested Initial Asset Allocation between Debt: Equity40:60
Monthly Investment Required ₹ 35,195

Above is the self-explanatory working of how much Venkatesh needed to regularly    (monthly) invest to accumulate the corpus to fund Sai’s graduation expenses.

This required amount of Rs.35,195 is to be invested in a given ratio of 60:40 in equity and debt mutual funds. This ratio will continue for another five years. From 6th year to 8th year, it will be 40:60 in equity and debt mutual funds. However, when the goal is three years away, the allocation will be 0:100 in equity and debt mutual funds.

Plan for Sai’s post-graduation expenses

Sai’s parents want to be ready for overseas expenditures for post-graduation too. If he could not make it abroad, they want him to do post-graduation in a reputed institution in India. So calculation purpose we mutually agreed that we would plan according to Indian post-graduation first and then in subsequent years more funds will be added for the overseas education.

Time for his graduation first year 16 years.

Current average cost of post-graduation in engineering 40,00,000 Inflation considered 10% considering Indian post-graduation course.

SAI’S POST GRADUATION EXPENSES
ComponentsAmount
Time Horizon 16 Years
Current Cost of the Goal ₹ 4,000,000
Rate of Inflation Assumed10%
Future Cost with Inflation ₹ 1,83,79,892
Current investment-linked towards the goal0
Expected Returns from Equity10%
Expected Returns from Debt6%
Avg. Portfolio Return Assumed8.4%
The annual increase in total monthly investment %5%
Suggested Initial Asset Allocation between Debt: Equity40:60
Monthly Investment Required ₹ 35,895

Above is the self-explanatory working of how much Venkatesh needed to regularly      (monthly) invest to accumulate the corpus to fund Sai’s post-graduation expenses. This required amount of Rs.35,895 to be invested in a given ratio of 60:40 in equity and debt mutual funds. This ratio will continue for another ten years. From 11th year to 13th year, it will be 40:60 in equity and debt mutual funds. However, when the goal is three years away, the allocation will be 0:100 in equity and debt mutual funds.

Plan for Anu’s graduation expenses

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Inputs I received from Venkatesh and Latha :

  • Anu is currently four years old. Time for her graduation first year is 14 yrs.
  • The current average cost of 4 years government-aided medical course is ₹ 30,00,000 approximately.
ANU’S GRADUATION EXPENSES
ComponentsAmount
Time Horizon 14 years
Current Cost of the Goal ₹ 30,00,000
Rate of Inflation Assumed10%
Future Cost with Inflation ₹  1,13,92,495
Current investment-linked towards the goal0
Expected Returns from Equity10%
Expected Returns from Debt6%
Avg. Portfolio Return Assumed8.4%
The annual increase in total monthly investment %5%
Suggested Initial Asset Allocation between Debt: Equity40:60
Monthly Investment Required28,973

This required amount of Rs.28,973 to be invested in a given ratio of 60:40 in equity and debt mutual funds. This ratio will continue for another eight years. From 9th year to 11th year, it will be 40:60 in equity and debt mutual funds. However, when the goal is three years away, the allocation will be 0:100 in equity and debt mutual funds.

Plan for Anu’s post-graduation expenses

Venkatesh and Latha want to be ready for Anu’s medical post-graduation too as medico post-graduation is very costly in India.

Time for her post-graduation first year 22 years

The current average cost of medico PG 50,00,000.

ANU’S POST GRADUATION EXPENSES
ComponentsAmount
Time Horizon 22 Years
Current Cost of the Goal ₹ 50,00,000
Rate of Inflation Assumed10%
Future Cost with Inflation ₹ 4,07,01,375
Current investment-linked towards the goal0
Expected Returns from Equity10%
Expected Returns from Debt6%
Avg. Portfolio Return Assumed8.4%
The annual increase in total monthly investment %5%
Suggested Initial Asset Allocation between Debt: Equity30:70
Monthly Investment Required ₹ 38,939

This required amount of Rs.38,939 to be invested in a given ratio of 60:40 in equity and debt mutual funds. This ratio will continue for another 16 years. From 17th year to 19th year, it will be 40:60 in equity and debt mutual funds. However, when the goal is three years away, the allocation will be 0:100 in equity and debt mutual funds.

This way, Venkatesh and Latha can arrive at the required corpus for their kids’ graduation and post-graduation long term goals as well as the amount needed per month to be invested for each kid’s education goal.

 Marriage Planning for Anu

Venkatesh and Latha wanted to have a traditional cum modern destination wedding for Anu in the future. And they wanted to be ready for this.

Plan for Anu’s wedding expenses

Inputs I received from Venkatesh and Latha :

  • Approximate Time for her wedding is 21 years.
  • The current average cost of an Indian wedding is ₹ 25,00,000.
ANU’S MARRIAGE
ComponentsAmount
Time Horizon 21 Years
Current Cost of the Goal ₹ 25,00,000
Rate of Inflation Assumed6%
Future Cost with Inflation ₹ 84,98,909
Current investment-linked towards the goal0
Expected Returns from Equity10%
Expected Returns from Debt6%
Avg. Portfolio Return Assumed8.4%
The annual increase in total monthly investment %5%
Suggested Initial Asset Allocation between Debt: Equity40:60
Monthly Investment Required ₹ 9,101

This required amount of Rs.9101 to be invested in a given ratio of 60:40 in equity and debt mutual funds. This ratio will continue for another 15 years. From 16th year to 18th year, it will be 40:60 in equity and debt mutual funds. However, when the goal is three years away, the allocation will be 0:100 in equity and debt mutual funds.

The above table shows the total value of the wedding cost, which includes the Gold part too. For accumulating Gold Venkatesh and Latha have two options.

# They can accumulate an adequate liquid corpus for gold purpose.

# They can have 5% exposure in Gold and accumulate separately for Gold expenses.

However, I strongly suggest accumulating the future need of gold for marriage by investing in debt and equity. Use the same for gold purchase for future usage. As I pointed above, if they are still inclined to go for gold, they can by having around 5% exposure.

Marriage Planning for Sai

Not only for daughters’ Indian parents have an aspiration for their Sons’ grand marriages too. Ventakesh and Latha also wanted to have sufficient corpus ready to welcome their daughter in law gracefully and splendidly.

Plan for Sai’s wedding expenses

Inputs I received from Venkatesh and Latha :

  • Approximate Time for his wedding is 22 yrs.
  • The current average cost of an Indian wedding is ₹ 20,00,000
SAI’S MARRIAGE
ComponentsAmount
Time Horizon 22 Years
Current Cost of the Goal ₹  20,00,000
Rate of Inflation Assumed6%
Future Cost with Inflation ₹ 72,07,075
Current investment-linked towards the goal0
Expected Returns from Equity10%
Expected Returns from Debt6%
Avg. Portfolio Return Assumed8.4%
The annual increase in total monthly investment %5%
Suggested Initial Asset Allocation between Debt: Equity40:60
Monthly Investment Required ₹ 6,895

This required amount of Rs.6895 to be invested in a given ratio of 60:40 in equity and debt mutual funds. This ratio will continue for another 16 years. From 17th year to 19th year, it will be 40:60 in equity and debt mutual funds. However, when the goal is three years away, the allocation will be 0:100 in equity and debt mutual funds.

Same as Anu’s case given table shows the total value of wedding cost, which includes the Gold part too. For accumulating Gold Venkatesh and Latha have two options.

# They can accumulate an adequate liquid corpus for gold purpose.

# They can have 5% exposure in Gold and accumulate separately for Gold expenses.

However, I strongly suggest accumulating the future need of gold for marriage by investing in debt and equity. Use the same for gold purchase for future usage. As I pointed above, if they are still inclined to go for gold, they can by having around 5% exposure.

Identifying the means and ways to accumulate the desired corpus

Ventakesh and Latha were now sure about their life goals after our first-round discussion. They also got to know about the required corpus of each of their kid’s education and marriage goals in our subsequent discussions. Now they were eager to know how they were going to achieve this and where they needed to invest the monthly required amount.

Before offering them different financial products, we discussed about some basic concepts of financial planning such as Asset allocation , Risk profiling, Different asset classes, their characteristics, their advantages and disadvantages , pros and cons of investing in them, compounding effect, benefits of long term investment, market cycles, risk associated with each asset classes, risk and return and their correlation, behavioral impacts of market fluctuations. The stomach to digest short term fluctuations of share market and most importantly being invested till their goals are achieved. I also discussed with them how important it is a to have a yearly portfolio review and to rebalance the portfolio according to their required asset allocation for every goal based on the time available.

This discussion is crucial for the advisor and client to get on the same page. Venkatesh and Latha were now clear about where they were going to invest, how they are going to invest, in what proportion and how long. It is only at this stage, specific financial products were suggested.

As they both were earning well, they could afford to allocate such a significant amount. Still, a foreign PG course may not be achievable with their current income.

Some personal thoughts

  • I know kids are precious gifts by GOD, and parents can go to any extent to make them happy and try hard to give them the best possible education but remember this is not the only goal of your life. Retirement planning should be one of the most important goals of everyone’s life. But unfortunately, in India, we postpone provisioning for the same, for the sake of other goals. Still, Child education and their Marriage planning are on the top of the list of individual’s goals. We sideline retirement planning for many years. Always give priority for retirement over any other goal.
  • The cost of education numbers considered for the above calculation may vary from parent to parent. For some, Rs.30,00,000 education cost may be more, and for some, it may be Rs.3 Crore. The planner will have to personalise it as per the client’s mindset.
  • You will get the clarity about your kids’ future education plan only when they are close to graduating from school. Hence, the corpus required will also change in future. Therefore, never assume the current cost as the permeant cost.
  • As you know the cost of education is increasing day by day even if you try hard to accumulate loads of money for kids’ education, you may find the shortfall in future. At that time, you can take help of education loan. Never hesitate to go for education loan and let your kids repay it when he/she starts earning. You should not allocate all your savings only for kids’ education goal instead consider Education Loan as the cushion whenever required.
  • You may dream so any things for your kids. You may want him/her to be Doctor/IIT Engineer or go to a foreign university to study and start accumulating corpus keeping these dreams in mind but always be ready to face reality. Kids may have different dreams and aspirations for their own lives. Kindly value those and accept them with those dreams full heartily. So always keep balance in accumulating the Education Corpus.
  • As far as marriage is concerned, I am against big fat weddings. Never stretch your budget too much beyond your limit. Wedding is a celebration of two individuals and their close families. Only keeping society pressure in mind and spending a lot on a wedding is not worth it. Ask your kids to contribute to their marriage.
  • Reviewing your portfolio is a must. Hence, I strongly suggest you a yearly review of the portfolio and set the asset allocation as recommended by the planner.
  • Last but not least, TEACH your kids the VALUE of MONEY. This is the most crucial lesson in life. Make them Emotionally and Financially independent and Mentally healthy to face the harsh reality of this world. Money can be earned any time, but developing kids’ personality and inculcating core and true values in them is most important. SPEND some time with them. Create memories which they cherish for the lifetime. Your quality time is their most precious GIFT you can offer them than education and marriage corpus.

These strictly are my personal opinions. The advice provided will change person to person.

I am glad Venkatesh and Latha were able to appreciate what was necessary to secure their children’s future. They are in regular touch to shares their progress. I wish them and all of you all the best on the journey towards financial freedom.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, 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. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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10 Comments

  1. Sai’s graduation 35,195
    Sai’s PG expense 35,895
    Anu’s graduation 28,973
    Anu’s PG expense 38,939
    Anu’s marriage 9,101
    Sai’s marriage 6,895

    What is this sir? Only for kids expenses he has to spend 119,103 per month.. Will he be able to live?

    1. I feel the numbers are Inflated. Cost of engineering today in a tier 1 college in bangalore is only 5-7 lakhs. I am not sure if Venkatesh wants his children to study in India or abroad.

      Good for him if he is able to save so much.

  2. Excellent post. You have explained clearly the role an Adviser plays in organizing one’s “personal finance”. @ Preeti Zende great example as well, I am sure almost every parent will have this goal, most importantly the way you have shown the “personal” aspect of so commonly sounding goal.

  3. Pattu sir,
    I’m already using your Google sheets financial planner. I don’t see the option to arrive at the “Monthly Investment Required” considering 10% increase in investment YoY.
    Sir, do you have any such calculator like that where we can find the monthly investment required considering the above inputs mentioned in the post?

    Irrespective of that, the money required for children’s education is mind boggling.

  4. Pattu sir,
    Do you have any calculator considering the above inputs and get the “Monthly investment required” considering the increase in investment YoY? I’m already using your Financial Planner in Google sheets but the yearly investment increase is missing.

  5. Hi sir…my question is not related to this post. Low AUM of MF might have high expense ratio and large AUM might not give good returns and suddenly increasing AUM might stress the fund manager. Is this statement true, if so what is the optimal AUM we should look for?

  6. Why to overcomplicate so much? Especially when goals are 10+ years away.
    Save and invest as much as you can at an appropriate debt-equity ratio.
    Not sure in which state is Medical cheaper than Engineering?

  7. I understand that the idea behind the article was to trigger and encourage people to plan for their kid’s future, but the investment amounts assumed are not at all practical. It just feels like the planner created a fictional family with highly unrealistic goals!

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