Plan for your child’s college expenses in 12 steps!

This is how you can plan for your child’s education and marriage in 12 steps.

1. When to start planning. The moment the pregnancy is confirmed!

2. What do you do first? Evaluate your insurance cover and buy more if required.

3. How to evaluate insurance coverage?  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 for 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 in college education and marriage (this is related to  pt 4 below)

Therefore, in addition to the insurance coverage, an implementation plan must be discussed with the spouse and a close family member (why?)

Use the free insurance calculator we developed at the SEBI Investor Education Website.

For comprehensive planning of education, marriage and other goals (your retirement!) you can use the freefincal robo advisor tool.

4. What next? The next step is to recognise that college education costs a lot! The corpus you save up could determine where and what your child studies. So, you must consider 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 a college education would cost when your child is ready. 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 your child is about to enter college!

We can’t plan for such an event, but we can start early, invest enough, and be aggressive.

6. How much? The first step is to determine how much to invest. The freefincal robo advisor will help by factoring in a risk reduction strategy as the school graduation approaches. Be sure to increase the monthly investment each year.

The corpus created for 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 be spent over 4-6 years.

7. Where NOT to invest?

• Any product with the word ‘child’ in it! Be it a ULIP traditional insurance policy or mutual fund. All of them are complicated products.
• Any product which locks up money or matures when your child turns 18.  Most children finish school before their 18^th birthday!
• If your child is already 4/5 years old, a PPF may not mature in time. Of course, the money can be used later, though.
• 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!

 8. Where to invest? Finally!

• If you begin early, immediately after your child is born or earlier, you can have a 60:40 equity: debt allocation.
• If you begin when your child is 3 or 4, there are 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 a purpose. In my view, direct equity is too risky for this goal. A simple Nifty 50 or Sensex index fund will do!
• If you have begun early, maxing the PPF investment is unnecessary. Invest as per asset allocation.
• If the allocation gets skewed because of a bull run, shift gains to PPF.
• You can use the Sukanya Samriddhi Account Scheme for the child’s higher education (PG) or marriage, but do not go overboard on the investment. Stick to your asset allocation.

9. Why plan for his/her marriage?  Can’t he/she not handle it? Perhaps, perhaps not. The main aim is to ensure their marriage does not affect our retirement nest egg. Read more: Should I plan for my child’s marriage?

Similarly, (I believe) ensuring our children do not start their careers burdened with debt (education loans) is important. Hence, we must start early, invest, and manage the portfolio correctly.

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 depending on where the child wants to study. This could be very different from the parents’ wishes/expectations. Not much can be done about this. That is the way the cookie crumbles sometimes.

12. Review the portfolio once a year: Focus on how much the portfolio is worth. Where your portfolio should be based on your assumptions and where it is now. How do you plan to systematically reduce risk in the portfolio by gradually decreasing equity allocation well before the goal deadline? This may help: Review your goal-based investment portfolio with this auditing tool.