How to plan for child education expenses6 min read
It is not a simple matter to your child’s education investment plan. You may believe that you can “cross the bridge when you get to it,” but by then you may have realized that you lack the financial means to enroll your child in his or her preferred college. Taking all possibilities into account, for example, if your child decides to pursue higher education abroad, you’ll need to have the necessary finances on hand. As a result, it’s critical to begin saving early so that you have a sizable savings account before your child begins school or college.
In this article, we will discuss how to plan for child education, and ‘which are the best investment plan for child education.
Start Saving Early
It’s best to begin saving for your kid’s education plan as soon as he or she is born. You’d have enough money by the time they are 18 to send them to college without any problems. College costs now will appear modest in comparison to what they will cost in the future. There will undoubtedly be inflation as the year’s pass. As a result, one cannot anticipate that tuition fees will remain constant throughout time. Having a suitable fund for each of your children would necessitate a well-thought-out strategy. There is also the option of taking out loans, although it is advisable to start saving sooner rather than later when paying off student loans with high-interest rates.
You can begin saving with your family’s combined income in mind. After calculating how much school expenses will cost, you can set aside a modest amount of your family’s monthly income for savings. If you begin saving as soon as your child is born, you will have enough money when he or she is ready for college. After you’ve saved a substantial sum of money, you can begin investing and see your money increase.
Factors to take into account before diving in
If you intend to begin saving before the birth of your child, it is a good idea because you will have more time to better financial plan for your child’s education. It is, however, never too late to begin saving for your child’s education plan. You would have enough money if you had been saving consistently for 18 years. If you are late in starting your savings, though, you can still catch up by raising the amount you aim to save each month. You can begin preparing with the number of years in mind, but the longer the time horizon, the better the savings.
Cost of education
The amount you save each month will be determined by the date you began saving. The earlier you begin your savings strategy, the less you will have to save each month. The amounts will alter if you wish to plan ahead and assume that your child wants to pursue a master’s degree overseas.
There may be times when you are not financially solid enough to afford all of your educational fees. It’s always preferable to be prepared and know what the future costs will be. You can always approximate how much the tuition cost will be in the future based on inflation, but this may vary and you shouldn’t anticipate an accurate estimate.
If the current cost of school is Rs. 16 lakhs and the predicted yearly inflation rate is 6%, the fees will be approximately Rs. 43 lakhs by the time your child reaches the age of 18. If your child is currently one year old, this will be the situation.
You should consider how much you have saved so far and how much you still need to save. Once you have a substantial sum of money, you can invest it in mutual funds through a SIP (Systematic Investment Plan) or a bank through a Recurring Deposit.
Monthly savings will help you acquire the amounts you require, but once you have sufficient finances, you may begin investing. Your savings can be utilized to invest in SIPs, ULIPS, and PPF for your children.
In the following points, we are discussing ‘financial planning for child education, ‘how to plan for children education’.
Systematic Investment Plans (SIP)
Making money work for you rather than for you laboring for money is always a good idea. Everyone saves money, but you can be wise and invest your money instead, and watch your money grow. SIP stands for Systematic Investment Plan, and it allows you to make little investments at regular intervals to help you realize your goals. If you invest regularly for a longer period of time with a SIP, your money will grow over time as you earn returns on your investment.
Benefits of SIP
- Convenience – SIP allows you to invest in a systematic and progressive manner. It allows you to begin investing with as little as Rs 500 every month.
- Mitigating Stock Market Risk – The stock market can be volatile at times, and if you invest in a SIP on a regular basis, you won’t have to time the market. When markets are low, you can acquire more units. This lowers your overall investment cost.
- Compound Interest – When compared to a one-time investment, compound interest ensures superior long-term advantages.
- Higher Yields – When compared to traditional RDs and FDs, SIPs provide higher returns, allowing you to battle inflation more effectively.
Unit Linked Insurance Plan (ULIP)
Insurance firms sell a unit-linked insurance plan that combines insurance and investing into one package. With the escalating costs of education, a strategy for investing must be devised. On the other side, if something bad happens to you, you must have a backup plan in place to ensure that your child’s education plan is not jeopardized. That’s where a ULIP comes in handy, as it combines an insurance and investment plan in one package.
Benefits of ULIP
- Flexibility – Under the same policy, ULIPs provide a variety of high, medium, and low risk investing possibilities. You can select an appropriate policy based on your risk tolerance. ULIPs give you the option of choosing the sum assured or premium based on your needs.
- Liquidity – In the event of unforeseeable future occurrences, ULIPs allow you to make a partial withdrawal; you can take funds from your Unit Linked account after the first 5 years.
- ULIPs enable you to develop a disciplined and regular saving habit, which will go a long way toward creating a corpus for your child’s future.
- Section 80C of the Internal Revenue Code exempts the premiums paid toward the policy from taxation.
Public Provident Fund (PPF)
Public Provident Fund (PPF) plans are popular long-term investing options with no minimum age requirement to join an account. So you may invest in a PPF for your child investment plan since it provides security, an attractive interest rate, and tax-free earnings. You can collect a lump sum maturity amount by the time your child is ready to attend college to follow his or her desired course because a PPF account has a 15-year lock-in term.
Benefits of PPF
- Risk-free returns: The Government of India backs the Public Provident Fund. One of the most important PPF account advantages is that it is completely risk-free. The government guarantees the returns as well.
- Multiple tax advantages: The most significant advantage of a PPF is that it enjoys an exempt-exempt-exempt (EEE) tax status, making it one of the few investments in India to do so. The first Rs. 1,50,000 invested is tax-free, the interest earned is non-taxable, and the maturity amount received after 15 years is also tax-free. As a result, it is one of the most tax-efficient investments available.
- Flexibility: A PPF account can be opened with as little as Rs. 500 and as much as Rs. 1,50,000 per year. These investments can be made in a maximum of 12 installments or in one lump sum.
- Partial withdrawal and loan options: Although the PPF has a 15-year lock-in term, you can take a loan between the third and sixth years (up to 25% of the balance available at the end of the two years before the year in which you apply for the loan). You have 36 months to return the loan, and the interest rate is 2% greater than the interest you earn. You can make partial withdrawals from your account starting in the seventh year.
When it comes to your child’s education saving plan, having a clear strategy in mind is critical. This is because the current educational costs will be vastly different from those in the future. As a result, having a clear savings and investing plan in place in a staged manner is critical for your child’s financial security.