The big shift in education in the last 20 years is not just that the costs have gone up sharply. That is something that has certainly happened. The real shift is that individuals have started looking at child’s education as an investment rather than as expenditure. When you start looking at it as an investment (tangible or intangible), the next step is to plan for the same. That is why in any long term financial plan these days; child education planning has become such an important component. Before you embark on the journey of planning for your child’s future, there are some mistakes to avoid while planning for children education. Child education planning in India is still at a nascent state but it is catching up fast. Let us look at a scientific approach to building a child education plan calculator. Here are the 8 mistakes you must avoid when planning for your child’s education.
1. Don’t underestimate the future cost of education
Education costs have shot through the roof, both literally and metaphorically. A 4 year engineering course costs Rs.10 lakhs while a medical degree can cost thrice as much. Blue chip MBAs are also awfully expensive. Effectively, a good education within India will cost nothing less than Rs.60-70 lakhs. All this pertains to a domestic higher education. If you are looking to educate your child abroad, then the actual cost will be nearly 3 times this amount. Be as aggressive as possible in putting down cost expectations.
2. Don’t overestimate the returns on your investments
This is a common mistake people make. Just because bonds are giving you 9% returns currently, it does not mean that it will sustain to eternity. Talk to your financial advisor and get clarity on the sustainable rate of return. Try to be as conservative as possible when it comes to estimating the returns on investments and try to keep them as conservative as possible. It is always better to be surprised on the positive side.
3. Don’t delay the start of your child education planning process
Even if you start small it is ok but start early. Ideally, start when you child is around 1 year old so that you have enough time at your disposal. The earlier you start, the more your save and the more you save the more your savings earn for you. This is referred to as the Power of Compounding. For example, if your child is currently 3 years old and if you plan to accumulate Rs.60 lakhs when your child is 18 years of age, you need to save just Rs.12,000 per month to achieve the target. That is why starting early is so critical in child education planning.
4. Don’t make the mistake of putting long term money in bonds and liquids
Don’t play it safe when it comes to planning over a 15 year period. Equity and equity funds are best suited to outperform over the long term. If you have a 15 year time frame there is no point in putting 60% in debt. Look at putting at least 85% of your money in equity and equity funds. If you invest too much in debt, you are limiting your return generating capacity.
5. Avoid lump sum investments and instead prefer to do SIPs
Waiting for lump sum investing is not a great idea. Rather start off with a systematic investment planning. That way you are hitting two birds with one stone. On the one hand, you can start early and make power of compounding work in your favour. The approach also syncs inflows and outflows. Secondly, you don’t have to worry about timing the market as the rupee coast averaging (RCA) takes care of getting you the best price.
6. Adopt a staggered and graded approach to your plan
Most of us see a gradual rise in income over time. It may not happen in a linear fashion each year but on an average it does increase. That means your approach to child plan investment must also be graded. Look to gradually increase your investments so that either you can use the funds for other purposes or you can get the corpus ready earlier.
7. Don’t ignore regular review and rebalancing of your child education portfolio
Planning for your child’s future is not just about returns but also about risks. You must avoid the temptation of sector funds and thematic funds as it adds concentration risk to your portfolio. Prefer the stability of diversified equity funds. More importantly, investing is dynamic and you need to tweak the equity / debt mix as you go along. When you have 15 years to your child’s education it is fine to remain 75% in equities but not when the milestone is just 2 years away.
8. A lot of people commit the mistake of forgetting about insurance
Don’t even forget to attach insurance to your child’s future planning. This should be distinct from the normal insurance covers that you have. You need a unique insurance policy that designed in such a way that even in your absence the child’s future plans should not be affected. This is the most important aspect of planning for your child’s future.
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