My 3-year-old son Abhinav wanted to be an auto Rickshaw Driver. Yes! the rickshaw has impressed the little kid. After One year, he wanted to drive the bus. Now, he is 5 years old. His dreams have started to fly. Now, he wants to be a Pilot.
He is posing a serious challenge to me. If he keeps upgrading his future career through this pace, I have to arrange a princely amount for his education.
Do you also have a kid? If yes, you would be also concerned about the education of your child. The new age children are assertive, and we can’t decide the career for them. Hence, we have to be prepared to give the education of their choice. However, the education can be very costly.
The pilot training is not cheap. Getting a medical degree requires a lot of money and patience. An MBA Degree from the American university can make a big hole in your budget.
Do you have an idea of present education costs? Do you have planned for your child education? Do you save enough money to fulfill your child’s dream?
I know, most of you answer in negative. So, get ready. It is time to Do Your Homework. I have chalked out a ‘Five Step Plan’ for child’s future.
1. Discover Their Dreams
Actually, This is the most difficult part. Why? because most of us are not really aware of our child’s dream. With the abundance of information, kids are ready to explore the new avenues, while we think on the traditional path. Apart from the engineering and medical, kids might aspire to be a fashion photographer or an artist. Sometimes, even we don’t have an idea of children’s aspirations. A small experiment by Axis Mutual Fund affirms this.
Therefore, let a teacher or counselor find out about the dreams of your child. You may not get the right answer.
2.Find Out the Present Expense For the Education
Once you know the future career of your child, the decision of education stream and college/university becomes easy. The education till 10+2 is almost same. But you have to take care of the graduate and post-graduate education. This higher education can be very costly.
You should consider it liberally as your child can have a different dream after some time. Hence, you should have higher provision for higher education. You should find out the expenses on engineering, medical, MBA etc. For foreign education do consider the living expense as well.
3. Factor in the Inflation in the Future Cost
The present cost of a course will not remain same after 5-10 years. The fees are increasing continuously. Other expenses will also rise. Hence, you should also factor in the inflation before reaching at an amount. You can use future value formula to get the future cost of the education expense.
4. Calculate the Required Investment and SIP
Now you have the future cost of your child’s education. But do you know the way to achieve this goal? Do you have an investment plan to accumulate the required amount? You might have some investment, then, what should be your future investment.
If you are going to invest a regular amount, you can use the SIP method. Use PMT formula in the spreadsheet to get monthly investment amount. But to use this formula you need the rate of return.
You can put the rate of return according to your preference. If undecided, use the ‘rate’ formula in the spreadsheet and put the expected monthly investment by you. The formula would give you the desired rate of return.
5. Choose the Right Investment
After you decide or get the rate of return, you have to choose the investment instrument. The rate of return may vary according to the investment. For fixed deposit, bond or saving scheme, this rate is 8-9%. For a balanced mutual fund, it is 11-13% whereas for equity mutual fund, it is 14-16%.
You have to choose the investment on the basis of required rate of return and your risk profile.
I will recommend the balanced mutual fund for child education. These mutual funds invest into equity as well as in the fixed deposit. Because of this mix, you get a greater safety with the benefit of equity.
Following these 5 steps, you can have a decent corpus for your child’s education. If all this steps and calculation seems complex and cumbersome to you.