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    Financial planning: How to save money for your child’s education

    Financial planning: How to save money for your child’s education

    Financial planning: How to save money for your child’s education
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    By CNBCTV18.com Contributor  IST (Published)


    There are ways that parents can save money and build a fund pool to finance the higher education of their children. Read more here-

    Higher education is a stepping stone to a brighter future but comes at a high cost. The cost of education has skyrocketed in the last year — education inflation was 0.63 percent in April 2021, which is now 4.12 percent in April 2022. While several factors have contributed to this increase, mainly the ebbing pandemic and the reopening of institutes, the rising cost of education is a cause of tension among parents who struggle to fund the expenses. The expense is even more if the parents opt for abroad education for their children.
    The rising cost does not mean that the dream of quality higher education should be left behind. There are ways that parents can save money and build a fund pool to finance the higher education of their children.
    Start saving early to save more 
    It is a golden rule that parents should follow. For example, Person A has a 3-year-old son, who will graduate in 15 years. The cost of graduation in today’s age is Rs 5 lakh in India. If we take inflation at 10 percent, the cost of graduation in 15 years will be approximately Rs 21 lakhs. If Person A starts saving for his son’s education now, he will need to invest Rs 4,180 per month. But if he delays this investment and starts in the next five years, the investment will have to be double, Rs 9079 per month. Early investment is the key to saving money for education.
    Explore varied investment options
    Keeping money in a savings account is not the only way a parent can save money. In most cases, the interest won’t amount to anything substantial considering the cost and education inflation. There are various child plans offered by companies that take care of most of the expenses, including insurance cover. While it is a smart way to invest in your child’s education, do not get fooled by names or the terms of these plans. Inspect the product carefully before investing. You can also approach a financial advisor to help select the right investment plan.
    Some investment options for parents to explore:
    Sukanya Samriddhi Yojana
    The Girl Child Prosperity Account is a government-sponsored saving initiative for the girl child under the initiative called “Beti Bachao, Beti Padhao”. A low-risk scheme with a 7.6 percent interest rate, the account can be opened in banks and post offices. The funds can be withdrawn when the girl child turns 18.
    Mutual funds
    Parents can invest in Mutual Funds as per their risk appetite through a systematic investment plan (SIP). The money gets automatically debited from the account regularly or at stated intervals. A great financial planning instrument for the long term, parents can save up to Rs 45 lakhs in a span of 15 years. For instance, Person Y starts an SIP of Rs 10,000 monthly when his child is born. They would have Rs 45.28 lakhs by the time the child reaches the age of 15, yielding around 12 percent per annum during the period.
    Index Funds
    Index funds mimic the composition of the market like Nifty, Sensex, etc. They are passively managed by the fund manager, that is, they do not play an active role in selecting industries and stocks but simply invest in all the stocks that make up the index. In short, they invest in the stocks in an attempt to replicate the performance of a market index such as the Nifty50. They are easier to manage as they do not require in-depth investing knowledge, research, and tracking. The fund manager only has to rebalance the portfolio periodically.
    Education loans
    It is never a wise decision to fund your child’s education at the cost of your retirement plan. If your savings cannot fund both goals, it is better to apply for an education loan. There are various loan products in the market available to finance education in India and abroad. As per the risk appetite and the financial position of the parents, they can choose to apply for a loan with collateral or without collateral. The loans do not disrupt the financial planning of the parents as the child repays the loan when they get employed. Loans teach financial prudence to children who learn the value of budgeting, and parents can be rest assured that the future of their child is taken care of.
    The writer Ankit Mehra is the Co-founder & CEO of GyanDhan. Views expressed are personal.
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