As parents, we aspire to provide the best for our children. We must pay special attention to financial planning for their higher education. Rising education costs coupled with aspirations of quality education demand that we start planning as soon as we can. One of the challenges in financial planning for our kid’s higher education is estimating future fund requirements. An adequate purse can give your child’s dreams wings. But how much is “adequate”? It’s tough to calculate this accurately. Hence, the best we can do is to keep a few things in mind while doing our calculations. 

Estimating the current cost of education

Estimating future education costs is the first step towards building a fund for your children. With a goal in mind, you can work backwards to achieve it. The cost of education would vary for each parent and child as it would be dependent upon the type of course your child may be interested in. Admission to private colleges or professional courses such as engineering and medical cost much more than the rest. The costs could be much more should your child decide to study abroad. Therefore, your estimate should be on the higher side.

Today, doing an MBA from a premier institute may cost upwards of Rs 20 lakh, a medical course may cost over Rs 25 lakh, foreign education could cost around Rs 50 lakh, and so on. And these costs will only rise with time. 

Factor in the rate of inflation

Education inflation exceeds headline inflation. Once you get an estimate of current costs, you need to apply the expected average inflation rate for the remaining period until your child’s higher education begins. For example, a two-year MBA at IIM Calcutta cost around Rs. 2.5 lakh in 2004.

In 2020, it costs around Rs. 27 lakh. This implies an average inflation rate of over 15% per annum. Assuming the same rate of inflation, the same course will cost Rs. 2.2 crore 15 years later. Therefore, with this figure as your goal, you can start calculating backwards. 

Select the best investment avenues

Since long-term financial targets may be steep, it’s important to use the right investment vehicle to get there. If you use the wrong investment option, you may fall short of the target and also strain your finances. Assuming you have 15 years to create a corpus of Rs 2.20 crore, what should your investment option be? If you invest Rs 1.5 lakh for 15 years in Public Provident Fund, at the current rate, you’ll only get to Rs 40.68 lakh. If you invest Rs 1.5 lakh in Sukanya Samriddhi for 15 years, you’ll get Rs. 63.65 lakh at maturity in 21 years. If you invest Rs 80,000 a month in a scheme similar to a fixed or recurring deposit returning 5.5% per annum, you’ll get Rs 2.2 crore in 15 years.

If you invest Rs 45,000 in a monthly SIP in an equity mutual fund delivering an average return of 12% per annum, you’ll also get to Rs 2.2 crore. Or if you do the monthly SIP starting with Rs 25,000 a month and then increasing this amount by 10% every year, you’ll also get to Rs 2.2 crore. This last plan seems like the most pragmatic than the others. Therefore, based on your aspirations, risk appetite, time available, and your ability to save, you must pick one or multiple investment options that will help you achieve your goal. 

Review your investments 

Like with any financial goal, you must review your investment and assess if it’s making the desired progress. If your investment is on track, you may not need to tweak your plan. If it’s falling short of your expectations, you may need to tweak it. If your rate of return is too low, you may need to introduce risk into your investment in order to maximise long-term rewards. If your plan is doing better than expected, at the appropriate juncture, you may want to book your profits and secure the capital instead of leaving it exposed to market forces. 

Finally

While accumulating money for your child’s higher education, you should counsel your child at regular intervals to understand their education and career interests. If there is a change in interests, immediately assess the change that may be required to your financial plan. You may also want to consult a certified investment advisor from time to time to avoid financial mistakes.