Saving for Child’s Education – Is it enough?

In my recent workshop in Gurgaon, one of the topics that came up for discussion was “child’s education”.

One of the participants, let’s call him Ashok, mentioned that he pays Rs. 25,000 a month as fee of the school where her daughter studies.

It ensued a debate on how education expenses have risen dramatically over the past 10 to 15 years.

Ashok himself incurred only about Rs. 1 lac to complete his engineering – 20 years ago though.

Yet another participant mentioned that he spent just about Rs. 2 lacs as fee for his engineering and MBA.

I couldn’t resist mentioning that my own MBA – all tuition, lodging, travel and fun expenses included was completed in less than Rs. 1.5 lacs.

In fact, my entire year school expenses including fee in Class 10 was Rs. 10,000 only. This is a far cry from the fee of Rs.25,000 a month that Ashok pays for his daughter.

Of course in all these cases, the people went to Government funded and subsidised institutions, which charged only a nominal fee.

Times have changed though. The government institution doesn’t cut it any more.

As a parent, the one thing that you want to prepare your child for is to be ready for life in the best way possible. You want to equip her with the necessary skills and knowledge. You want the child to have an exposure that enables her do her best in life. You want her to stand on her own feet.

There’s a new breed of educational institutions (Schools, Colleges, Universities) that promise the fulfilment of these conditions.

You want the best for your child. Period.

However, what does it mean to you in terms of money? How much would you need to invest for your child’s education?

Education is damn expensive

One thing is given that the new education does not come cheap.

Ashok pays more for his child’s school fees than the rent of the house he lives in.

The child is still at Primary School. Then there will be High School, College and the University.

Hopefully, with the firm foundation that the child will create for herself in the early stages, the need to fund her higher education should not be very high. The child can also avail of several scholarships available these days.

But as you would agree, the scholarship may not come through or even if it does, it may not be enough. You would not want to let yourself be unprepared in case a full funding is required.

So, that brings us to the question. Will you be ready to fund your child’s education? Are you saving enough?

You can find the answers with this new Savings for Child Education – Calculator. But before we get there, let’s understand the cost for Ashok’s daughter’s education and the savings required for it.

The real cost of education and saving for it

In Ashok’s view, if his daughter, Rhea, plans to do engineering, it will cost Rs. 30 lacs at least. This is today’s value, not counting inflation.

Rhea is 5 today and she will start her engineering at 18, that is, 13 years from now.

Assuming that education costs rise at 10% a year on an average, Rhea will need over Rs. 1 crore (Rs. 1.03 crores to be precise) for her engineering education.

Yes, that Rs. 30 lacs of today for an engineering course will turn into Rs. 1.03 crores in 13 years.

Now, to achieve that figure, Ashok needs to save Rs. 33,610 a month for the next 13 years. This assumes that he averages a 10% return on his investment during this period.

If he were to earn 8% per year return on an average, he needs to save Rs. 38,700 a month, that is, Rs. 5,000 extra per month.

Does that make your eyes open wide?

Now, I know these numbers may not apply to your needs.

So, I have done something for you. I have made this simple calculator which you can download and use it with your own assumptions.  Nifty, isn’t it!

Click to download the Saving for Child’s Education Calculator

The fields are pretty straightforward. Just ensure that you input only in the yellow coloured cells.

I know what you are thinking now. 

How do you earn an average return of 10%? Where should you invest?

In a previous post on retirement fund planning, I had suggested the following:

• To earn an average return of 8%, you will have your investments predominantly in fixed income / debt based investments. These include Bank FDs, EPF, PPF, NSCs and some tax saving mutual funds.
• To earn an average return of 10%, you will  have to move further towards equity – say a 50:50 ratio between fixed income and equity investments.

So, your choice of your investments should take into account this factor.

Please note that these assumptions can change significantly over time.

Beware

All said and done, your child’s education is an emotive issue for you. And that is what some products use to manipulate and sell you investments that are not the right fit for your needs.

As an example, Child Education Plans offered by Insurance Companies are not the best investments. Don’t lock in your money in an inflexible, high expense and low return investment.

Ashok made the same mistake too investing in a Smart Kid policy.

A smart kid policy may not end up making your kid smart.

Nor do the endowments and money backs in whatever fancy avatars they may be sold to you.

A mutual fund sold in the name of Children’s career may not be the right investment too. These mutual funds are more like debt products. They are not tax efficient as well.

But see what your calculator tells you. After that, you have two choices – either save more over time or make your investments perform more.

Ashok has realised this and now is restructuring his investments to ensure that his daughter Rhea gets the education she deserves and becomes a responsible and contributing citizen of the country.

How are you planning for your Child’s education?