The trouble with fixing the current cost of a child’s education

Published: November 12, 2015 at 5:44 pm

Last Updated on December 30, 2015 at 5:49 pm

The most important input while planning for a financial goal is the current cost of the future expenditure. When the goal is several years away, the current cost is a crude estimate.  For retirement, we can assume present lifestyle barring child’s education expenses and liabilities. For a Ferrari, we can enter the current cost. For a world tour, we can enter the current cost. What current cost would be enter for our child’s education goal? The other goals are for us so we can make a reasonable estimate of what we want.

When our child(ren) are years away from college and have no idea what they are going to do with themselves, what current cost could we enter? That is the  trouble with fixing the current cost of a child’s education.

The current costs of any financial goal can change from year to year. For example, due to ailment the monthly medical expenses can shoot up and this would affect the retirement goal and amount we need to put away for it. This is why a financial goal planner should be used one a year, every year.

Child’s education goal is problematic. The child’s desires can change widly as he/she nears school graduation. This could be because of developing individuality or peer pressure.  Our estimates of the current cost of a child’s education can be significantly off as the child grows older.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Easier said than done, but we need to put our retirement planning first in the list of priorities at all times. So if X is the monthly investible surplus, and Y is the amount needed for retirement planning, at least 80% of Y should be allocated for retirement from Y.

Only the remaining (X-Y or at least X-80% of Y) can be spared for all other goals. Suppose my son is 2 years old and about 15 years away from college.

I can invest 60% in equity (12% returns expected) and 40% in fixed income (7% return post-tax).

Therefore the net portfolio return expected is  (60% X 12%) + (40% X 7%) = 10%.

Inflation in cost of a child’s education: 10% (minimum). If you use more, you need to invest more. It is Diwali season, so let us no get depressed worried about actual inflation in education costs.

I invest (X-Y) each month for 15 years with a 10% return expectation. The corpus that I calculate

C = 12 * (X-Y) * ((1+10%)^15-1)/10%

is my current cost of my child’s education. You can use this Financial Goal Planner with Flexible Asset Allocation to plan and calculate for all financial goals.

Since income should increase each year (hopefully!), so should (X-Y). This can be factored in the above planner.

The main point of this post is, even those my son is only two years old, I set the current cost of my childs education now itself. This would be reviewed once a year, but I do not expect C to change dramatically.

This C is the amount that I would spend from my pocket to fund my child’s education. If my child aspires for something more expensive and/or if I am not wrong in my estimate of inflation (hopefully not return!), then the extra cost will be covered with an education loan. Related guest post: Paying off Education Loan in India

I cannot squash my child’s dreams by saying, “I can only afford this much’. At the same time, I cannot throw a spanner in my retirement plan and dip into it to make up for the shortfall.

This is of course for a normal, responsible child. If my child turns out to be a loafer who is not capable of putting in the necessary effort to match up to his aspirations, it would be a crazy idea to get him an education loan. So we will have to play it by the ear. Easier said than done.

Which is why I believe one should think hard before having a second child.  Read more: Some Tough Personal Finance Related Questions

The danger with the education loan is the kind of salary that the child would get after graduation. That should be enough to start paying off the loan asap. Otherwise, I will have to pay the EMI. If I am still in service, perhaps that is not a big problem. If I am retired by then, my retirement plan could go for a toss.

Planning for a child’s education is not easy. As the child grows, we can discuss career options and suitably adjust the current cost to some extent as long as it is not too close to school graduation.  Then there is the performance in the board exams, entrance exams, quality of college education (see below), reservations,  our emotions, what the spouse has to say at that time (aka peace or lack thereof in the family) etc. Scary!

Child-college-education

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will 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 and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
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 a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and 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 300 (instant download)