How to save for your child’s education? A financial roadmap

It’s a dream for all parents to see their children soar high in the academic world. We all want our children to study in the best schools and the finest higher education institutes. However, the ever-rising cost of education both in India and abroad can quickly turn that dream into a financial nightmare. But fear not, fellow budget-conscious parents! I have a strategic plan and some savvy saving techniques that will surely help you secure a bright academic future for your loved ones.

First things first: Calculate the expected expenses

Before diving headfirst into investment options, let’s take a realistic look at the numbers. You can’t come up with a sound investment plan without knowing how much wealth you need to accumulate for your future dreams.

For example, let’s assume your child is 8 years old right now. They go to school and aspire to pursue a B.Tech in Computer Science from IIT Delhi. This is a wonderful goal, but it’s important to remember that the cost of tuition and fees at IIT Delhi can be significant. Starting to save early will help ensure that your child has the resources they need to achieve their dreams.

Sample calculation for reference:

1. Current cost of the 4 year program: ₹ 10,00,000
2. Tentative age by which your child will be ready for admission: 19
3. Current inflation rate in India: 5.16%
4. Tentative cost of admission: Current cost * (1 + Inflation rate)^(Number of years) = ₹10,00,000 * (1 + 0.0516)^(11) = ₹17,39,227

It’s important to remember that this is an estimated cost, and the actual amount could be higher or lower depending on various factors like future changes in college fees, inflation rates, and other unforeseen events.

That being said, you now have a clear financial goal of accumulating at least ₹ 17 lakh by the year 2035 to fulfil your child’s academic goals. Remember, it’s crucial to regularly review and adjust your investment plan to account for potential changes in costs to ensure you stay on track.

Saving and investment tips to fulfil your child’s educational goals

1. Equity Mutual funds

For long-term investment goals (e.g., 10+ years), Systematic Investment Plans (SIPs) in index equity mutual funds can be a good option. Their low expense ratios and passive management style help eliminate individual fund manager biases. However, remember that past performance is not indicative of future results, and markets can fluctuate, potentially impacting your returns. Therefore, carefully consider your risk tolerance and investment goals before making any decisions.

Historically, index funds have delivered strong returns.

For example, the NASDAQ 100 index fund has a CAGR of 16% from 2007 to 2024, while the NIFTY 50 index fund has a CAGR of 11.5% since inception. It’s important to note that these are just examples, and your own returns may vary.

2. Invest in Government Saving Schemes

For individuals planning long-term savings, especially for children’s education or retirement, government-backed schemes like Sukanya Samriddhi Yojana (SSY) and Public Provident Fund (PPF) offer attractive benefits.

SSY, specifically designed for girl children, provides an impressive 8.2% annual interest rate, significantly exceeding current inflation, potentially offering real growth for your investment. However, it comes with a 21-year lock-in period.

PPF, on the other hand, offers a stable 7.1% annual return and a 15-year lock-in period. Both schemes come with tax deduction benefits under Section 80C.

Early Start, Big Impact with SSY:

The Sukanya Samriddhi Yojana (SSY) offers a compelling option for long-term savings, especially for girl children. By starting early, you can harness the power of compounding for significant wealth accumulation.

For example, consider investing ₹1,50,000 annually in an SSY account starting from your daughter’s second birthday. Based on the current interest rate of 8.2%, this could potentially amount to around ₹70,00,000 by the time she turns 21 in 2045. However, it’s crucial to remember that this is an illustrative example, and the actual maturity amount may vary depending on future interest rate changes.

3. Consider investing in Child Education Plans

Another good investment option to consider is Child education plans being offered by various insurers like LIC, HDFC Life, ICICI prudential, etc.

When someone undertakes a Child Education Plan, they have to pay a fixed amount (premium) every month / quarter / year throughout the policy term. On maturity date, the insurance provider pays back a lumpsum amount as per the policy terms and conditions.

To learn more about Child Education Plans, please visit this blog page on ETmoney.

4. Invest in Sovereign Gold Bonds

Sovereign Gold Bonds (SGBs) can be a potential option for funding your child’s higher education goals. Here is why:

• Hedge against inflation, uncertainty and market downturns: Gold historically tends to hold its value against inflation and downturns in financial markets. Moreover, during uncertain times such as wars and pandemic, gold as an investment outshines all other investment options.
• Government-backed: SGBs are issued by the Reserve Bank of India on behalf of the Government of India. This offers a layer of security and stability.
• Interest income: You earn a fixed interest rate (currently 2.5%) on SGBs in addition to capital appreciation in the gold price.
• Tax benefits: Interest earned on SGBs is taxable, but the capital gains after maturity are tax-free if held for 8 years (lock-in period).

Read – FAQs on SGBs

Disadvantages:

SGBs don’t offer guaranteed returns. However, its volatility is comparatively less as compared to those in equity markets.

If we look at the historical price chart of gold during the last 10 years, then gold has yielded a CAGR of around 11%.

But it’s again important to note that past performance doesn’t guarantee similar returns in the future.

5. Be a savings ninja

Every penny saved is a penny earned towards your child’s education. Therefore, implement smart budgeting, cut unnecessary expenses, and consider side hustles to boost your income. Remember, progressive small changes often lead to big results.

How do you save for your child’s education?

Saving for your child’s education is a marathon, not a sprint. Be patient, stay consistent, and do not let the fear of rising costs hold you back.

Remember, the key is to start early, stay informed, and make prudent choices. With small and consistent efforts, you can turn the daunting task of saving for your child’s education into a journey filled with confidence and excitement.

So, tell me, how do you save for your child’s future education goals? Please share your thoughts in the comments below.