Invest in your Child's Future

Make the right investment for your child’s future

“The cost of college education today is so high that many young people are giving up their dream of going to college, while many others are graduating deeply in debt”

— Bernie Sanders

Even though this quote is said in the context of education in the USA, the situation isn’t much different here in India. When we meet our old friends over a cup of tea or coffee, we cherish our school/college days. These nostalgic memories take us back to the good old days when it was much easier to dream, set our goals and achieve them with ease. The inexpensive lifestyle in those days gave us a lot of room to lead a carefree life.

Do you remember that schools use to collect a ‘humble’ fee of Rs 11,000 from a standard 12 student 15 years ago? But now the same education would typically cost about 2 lakh which is ten times more.

We at Finity tell our customers how the inflation in the education system rises in double-digits while your purchasing power climbs by just 6-8% each year. Simply put, it is tough for us to make ends meet.

The table below shows how expensive your child’s education would be (in a 5-year spread timeline) if education costs keep increasing at 12% every year. Just so that numbers are relatable and easier to understand, we have normalized the education costs for 5 years ago by computing them at the same rate:

Rising Costs of Education in India

You would have realized by now that as years pass the expenses would keep increasing, while your salary wouldn’t increase in the same proportion, unfortunately. Moreover, these forecasts of education costs don’t take costs of gizmos, gadgets, sports amenities and extra-curricular costs into consideration, which make education unaffordable even further.

According to HSBC Value of Education Survey 2018, there was an INR. 4.15 lakh shortfall between what parents contributed and what students needed for a complete education.

This is quite an eye-opener and reflects the under-preparation by parents for their children’s education. A major reason for such a discrepancy is the fact that parents do not fully understand education inflation and so, are unable to financially plan in an adequate manner.

Let us explore some investment options which are specifically focused on financially securing your child’s future:

Sukanya Samriddhi Account:

  • This investment can be made only in the name of a minor girl child and should be initiated before she turns 10 years of age.
  • Each girl child can have only one account and this can be opened for a maximum of two girl children.
  • The current rate of interest is 8.5% per annum which is tax-free.
  • Scheme qualifies for tax deduction under section 80C.
  • Minimum Investment amount: INR. 250, maximum investment amount: INR.1.5 Lakh in a financial year.

Children’s Fund

  • These funds have a lock-in period of 5 years or till the child attains the age of majority; whichever is earlier.
  • An investor can choose debt-oriented or equity-oriented schemes in the name of his/her minor child.
  • Minimum SIP amount: INR 500.

“The problem with Indian education is that education in itself is overrated while the need to financially plan for it is underrated”

Now that we’ve understood the need and benefits of long-term planning, don’t hesitate, make the smart choice and starts investing. Let your aspirations come alive.

Child's Education Goal - Dipika Jaikishan

How to invest towards Children’s Education Goals?

This video helps you to plan your child’s education successfully and tells you the need to invest right now for your child’s future.

Here is a quick overview of this video:

  1. What is a child’s education plan?
  2. What your basic motivation should be while investing in this plan?
  3. Where can you invest in your child’s future?
Child education

Secure your Child’s Education

Most of you would have heard these words of wisdom from Nelson Mandela:

Education is the most powerful weapon which you can use to change the world.

— Nelson Mandela

But the rising costs of education (at all levels from elementary school to college higher education) have made it harder to get a quality education for our kid(s). Quoting Arne Duncan (who was Secretary of Education for the USA):

State governments generate less revenue in a recession. As state leaders struggle to make up for lost revenue, legislatures tend to cut funding for higher education. Colleges, in turn, answer these funding cuts with tuition hikes.

— Arne Duncan

Arne is talking about the state of education in the USA, this isn’t any less true here in India. 10-15 years ago, fees for a good school was about Rs. 10000-12000. The same quality of education in the same school for standard 12 is now about Rs. 2 Lakhs per year. That’s a hike of over 10x in 15 years. For the uninformed, most expert financial advisors say that while purchasing power parity increases by 6-8% every year, education inflation is always in 2-digit numbers.

Think of the times when we reminisce about missing the good old days from when we were younger, studying in schools and colleges (at a fraction of cost that we pay today for the same quality of education).

Forecast of Education Costs for next 10 years

Based on ‘Q3 2017 Salary Budget Planning Report’ (by Willis Towers Watson), Salaries in India are projected to rise at 10% in 2018 (the same as an actual increase in 2017). But education costs are stated to increase by 12% on an average across different grades.

To give you an idea about the hike in education costs in a 5-years spread timeline (assuming that costs continue to rise at 12% every year), here is a simple illustration:

Under-graduate₹ 1,41,857₹ 2,50,000₹ 4,40,585₹ 7,76,462
Post-Graduate₹ 11,34,854₹ 20,00,000₹ 35,24,683₹ 62,11,696
Higher Education A-tier (abroad)₹ 28,37,134₹ 50,00,000₹ 88,11,708₹ 155,29,241
Ivy League Higher Education ₹ 45,39,415₹ 80,00,000₹ 140,98,733₹ 248,46,786

At the risk of sounding redundant, it’s worth reminding that your salary would not increase at the same pace.

Miscellaneous education costs

Also, the above forecast doesn’t even consider ‘miscellaneous costs’ that piggyback on the top of regular education expenses (such as gadgets and other extra-curricular costs). We had been focusing on tuition expenses for our quantitative analysis above, but let’s not forget the additional financial burden of a standard of living that one has to maintain at schools (think gadgets, books, social activities for the child, etc.) Moreover, children, these days take extra classes (such as summer camps, extracurricular activities such as art or sports coaching, etc.) none of which come cheap.

Costs for college education

Well, while school education costs could be met by saving small amounts, the cost of higher education in college might easily take up 40% of your monthly salary.

In case you didn’t notice, this comparison only states the obvious: That as years pass, the costs of school and higher education would only go up.

What can you do to be financially prepared for your child’s education?

First things first: How much do we need to save? Based on calculations in the table above, parents have to eventually save Rs 65L for their child’s higher education.

Well, here is what we recommend to our investors on Finity app:

SIP + Term Insurance = a good education plan.

1. Invest in Mutual Funds

Our Finity app helps you to build a mutual fund portfolio to save for education.

Once you input your risk appetite while analyzing the past returns (1Y/3Y/5Y/10Y/15Y/20Y), our Smart Recommendation Engine (built on top of scientific financial models and years of historical market data) recommends a portfolio of mutual funds that will help you build the corpus for your child’s education costs.

2. Get term insurance which provides a cover of Rs. 65Lakhs.

This simply means that Rs 65L should be covered by a term plan. In case of your absence (such as accidental death), the education goal will not be compromised. This policy for a healthy adult of the age of say 32 would come at a premium of ~Rs 5000 annually. Let us not look at immediate gains causing ourselves long term pains and buy a term cover to secure education of kids even when we are not there for them.