Invest in Direct Mutual Funds and Term Insurance to 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 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
While Arne was talking about the state of education in 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, the 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 (same as 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|
Note: For easy comparison, education costs for 2013 (5 years ago) have been computed at the same 12% rate.
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 considers ‘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 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, extra curricular 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 (5-10% of your monthly income depending on your job), 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 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 can build a mutual funds portfolio to save for education. You can select Child’s Education inside our Save for a Goal feature:
Then you need to input some basic information about when you need the money, type of education you want for your child and how much can you set aside every month (i.e. monthly SIP):
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:
You can just click on Invest and start investing. You can even setup E-mandate (paperless using Aadhar OTM) or physical OTM using Finity app to automatically invest the specified SIP amount in this portfolio every month, which removes the burden of manual investments every month.
2. Get a 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.
Finity has a very simple and intuitive interface to find the right term insurance plan to suit your needs:
Before we can recommend you the right term insurance plan, we have a simple 5-steps form to understand your requirements from life cover:
Once we have this information, we recommend the right term plan(s) to suit your needs:
Just pick the right term plan to suit your needs and secure your child’s education.