Financial Planning for Child’s Education

financial planning for child education

“Education is the passport to the future, for tomorrow belongs to those who prepare for it today.” – Malcolm

In India, everyone firmly believes that education is everything. We want our kids to go to the top schools and support them in what they want to do. We understand the importance of good education, but the cost is a concern. The cost of education is increasing at a high rate. As per a report in Financial Express, education inflation stands at 11 to 12%. Let us understand the impact of this inflation.

Assume your son is three years old, and the cost of education today is Rs 5 lakh for the courses you assume he may get enrolled in. You have 15 years before your son gets ready for graduation. Assuming 11% inflation, the education cost will be approximately Rs 24 lakh. Financial planning for a child’s education becomes essential to beat high inflation.

Steps you must follow

You can follow the below steps to start financial planning for your child’s education:

  • Know the time: The first step is to know how much time you have for your child’s graduation. The longer the time horizon, the easy it is for you to plan for it. You must not delay and wait for the last hour to start planning. It is one of the essential and mandatory financial goals, and you must plan NOW.
  • Find the cost of education: It is one of the toughest questions to answer as the education cost will depend on many factors. The first question to answer is whether you plan to send your child to a foreign university or you want them to graduate in India. There is no way you can predict – the course your child will enroll in the future. You can only assume – your child will be in a profession similar to yours. For example, if you are a lawyer, check the cost of this field and factor in inflation to calculate the education cost in the future. You may need a lot more or less depending on what your child is interested in doing, but it is a good starting point.  As the child gets closer to their 10th/12th standard, one may be able to plan based on your child’s interests.
  • Know the amount that needs to be saved monthly: Once you know the amount for education, you must decide the amount you need to save and invest to reach the corpus. If the goal is far away, the easiest way is to opt for regular monthly investments. Your goal should be to put aside some money regularly to meet your goals. Assume you are unable to invest the required amount for a child’s education. Then, you must try to reduce your household and personal expenses or find an additional income source. Taking the help of your financial advisor is one of the best things you can do. You can achieve your goal with a lower investment amount with proper guidance. They have expertise in balancing the risk and the reward.
  • Plan your investments smartly: This is the most crucial step in financial planning. You have to decide where you will invest to achieve your goal. You need to invest your hard-earned money in suitable financial instruments depending on your risk profile and investment horizon. You will also need to follow asset allocation. When the goal is far away, you can make most of your equity investment. As the financial goal nears, you have to move gradually from equity to debt – rebalancing is essential. If you think you cannot do it yourself, get in touch with Right Horizons. We have expertise in financial planning.
  • Prepare for the unexpected: Like any other journey, you may have unexpected turns in your financial journey. You should be prepared for them. Figure out what happens to your goals if you have an untimely death or an accident and can no longer earn. One of the biggest setbacks to a child’s education is the death of the only breadwinner in the family, and there is no insurance. Have enough insurance for your life and health. The coverage should be able to take care of your family’s future needs and also take care of your child’s education. Investing in plans that offer a child’s education protection option (for example, ULIP) can also be considered. A financial advisor would be the best person to tell you which is the best option to secure your goals.

Start now

The last thing or the first thing you must do is to start NOW. One way to surely not achieve your goal is procrastination. Since it is a mandatory financial goal, you should start it as soon as your child is born. You can save and invest early since the longer the time horizon, the easier your financial journey becomes. The power of compounding works magic for you.

If you have any questions about your child’s education planning, get in touch with us. Right Horizons has a range of products to share your burden and you to secure your child’s future.

NRIs: Where to invest for one’s child’s overseas education

investing child’s overseas education as an NRI

As an old generation NRI, you may have lived a large part of your life in India, and you would want to spend your post-retirement years in India. You may have moved to a foreign land for a better life, better opportunity or higher income, or other reasons. Whatever the reason was, you may have decided to return to your homeland post-retirement.

However, there is a strong chance that your child, who would have spent most of his life outside, would want to continue living there and complete his education.

By the time your child is ready for higher education, you may have retired and not have a regular income. Also, as your child wants an education overseas, you will need a large sum of money. If you believe that you will be in the same boat in the coming years, you have to start planning for it now. Planning a child’s overseas education close to your retirement will be a huge risk.

How much to save for a child's overseas education?

Calculating the amount for your child’s education 10 to 15 years from now can be a daunting task. You may end up making a random guess as you are unsure what field your child will pick then. As you approach the requirement and you begin to understand your child’s interests, you can plan more specifically.  You could start off with a default course like Engineering that is not too low, nor too high. The idea is simple – the more you can save and invest for your child’s future, the more flexibility you give them to pick the field they desire.  

Few things to know before getting started

Before we discuss the areas where you can invest as an NRI for your child’s overseas education, you need to do your homework. We can call it pre-planning.

  • Get yourself insured Life is full of uncertainties, and when we talk about long-term goals, we need to have a plan B. For financial goals such as a child’s education, you would want no compromise, even in the unfortunate event that you are not around. Hence, you should have an insurance plan to ensure your child will receive good education under all circumstances.
  • Zero-debt Ideally, you will have to ensure you don’t have any excessive debt when you fuel your child’s learning.   You can consider taking an educational loan for tax saving purposes and if you would like your child to inculcate a savings habit when they start earning.
  • Define your Goals You need to define goals that should clearly state how you will accumulate the required amount for your child’s overseas education.
  • Develop an investment plan Look for a good mix of debt and equity instruments. Study instruments that suit the education need.  As you approach the requirement, you can reduce the risk by moving towards a debt bias.

Where to invest in a child's overseas education?

Mutual funds / PMS – Your child’s education is a long-term goal, and hence you can invest in mutual funds through a Systematic Investment Plan (SIP) or a lumpsum investment into a Portfolio Management Scheme(PMS) if the tenure is long enough and you have liquidity for a lumpsum investment. They give you great returns over time and safeguard your money from market volatility. It also avoids double taxation via the Double Taxation Avoidance Treaty (DTAA) rule, if eligible.

Global Investment Options: You can also invest in global funds through mutual funds, low cost ETFs or invest directly into the US stocks. It comes with an additional advantage. For example, if you invest in US companies, you create a hedge against currency risk. You give have double benefits to stock growth and from depreciation of rupee against dollar.

Unit Linked Investment Plan (ULIP) – As we mentioned above, you need insurance and investment options for your child’s education. You can fulfill these two goals through ULIP. With ULIP, a part of your investment goes towards the insurance bucket and the remaining towards the investment bucket. There are many ULIP plans with different features. Look for a ULIP that considers a child’s goals as one of the features.

Real Estate – Though many people don’t consider it an option for a child’s overseas education, it can be a good option if you have a lump sum amount to invest for your child’s future. The second important point is you should be able to find a property (residential or commercial) that has the potential to give you good returns.

Secure your child's future with us

Planning for the future is essential, but at the same time, it is tough for someone not into it. You need to have experience in planning and also the time to research to make the best investments. Right Horizons have years of experience making our client’s dreams a reality. Reach out to us if you want to enjoy your life while we take care of your crucial financial goals like a child’s overseas education.

Financial Planning Tips to Fulfil Your Child’s Overseas Education Dream

Financial Planning Tips to Fulfil Your Child’s Overseas Education Dream

As parents, you must have always encouraged your child to study hard for an excellent, bright future. And if your child has been dreaming to get into a world-class university abroad, you don’t want to compromise on that dream because of low funds.  To ensure that your child receives the very best and also does not have to get buried under loans in future, you should have a strong financial plan in place. Considering your current income, savings, and the inflation rate; the earlier you start accumulating funds, the better. Here are 6 things to keep in mind while planning finances to support your child’s overseas education dream:

1. Estimate The Entire Cost

The first thing you will probably think about is the college’s tuition fees and how to pay them. But you also need to factor in other expenses such as accommodation, food, utilities, and transportation. After all, your kid will have to settle and start a new life overseas.  Therefore, to make the transition as easy as possible, take a crack at the budget and break it down into smaller manageable goals.

2. Evaluate The Best Sources of Funds

Once you’ve got a budget, check all the sources of funds including your savings that could be from PPF, mutual funds, or fixed deposits. The foremost thing to do is try and apply for scholarships and grants that can take care of at least half your expenses. Next, check the available education loans for studying abroad to help you manage the remaining amount.

3. Plan Your Investments

Once you analyze your current assets and liabilities, you will get an idea of how much more you need to save. Considering the inflation rate, it is better to invest your money and let it grow over the years. And if your investment horizon is lengthier than 10 years, it is imperative to diversify your investments. While FDs, gold, real estate, and equity mutual funds are always an option, it is worth considering dollar investments like foreign stocks for abroad studies depending on your risk appetite.

4. Review The Investments Periodically

It is good to review how your invested money is performing from time to time given the market situation. If any of your investments are not performing as desired, you can make changes to them in time. For example, if the price of gold suddenly starts dipping or a mutual fund investment is not giving expected returns, you will need to shift your invested money elsewhere.

5. Get Insured

You can earn, save, and invest as long as you are healthy. But what if you meet with a sudden accident or have an untimely demise?  This is where life insurance, a term-end policy, and health insurance come in handy. Plan for an insurance sum that can at least take care of your child’s tuition fees in case of your absence or inability to earn.

6. Shift Your Portfolio to Less Risky Avenues

If you think you have accumulated a substantial amount, consider shifting that investment to minimum risk avenues to secure it rather than losing it due to market instability.  Examples of less risky avenues include savings accounts, money market accounts, FDs, governments bonds, and debt mutual funds as these options are highly safe and provide good liquidity due to the least market exposure.

Many parents jeopardize their present needs or future funds to fulfil their child’s dreams, but that is not the right way to go about it. Instead, keeping the above things in mind, wise up on how to make a solid child education plan which includes a budget, study loan for abroad, investments, and insurance.  The importance of starting early cannot be emphasized enough – the earlier you start, the less stressful it will be for you to accumulate the required sum of money. Also, consider sharing the responsibility with your kid once they are in college. Explain to them the value of earning and saving money for their own benefit.

Investing beyond India

Investing in Indian stocks and assets | Right Horizons

If you are investing in Indian stocks and assets, you might as well expand internationally. For three reasons: the prudence of forex diversification, participation in the growth story of markets, and a more lucrative outlook for your portfolio. Let’s see why it’s important in more detail.

Reasons why you should invest across borders:

  1. Currency diversification

A truly balanced portfolio of Indian and international stocks over the long-term has proven better risk-adjusted returns with lower volatility. Currency diversification can be influenced by your lifestyle and financial goals. Here’s how you do it. Understand the currencies that you’re exposed to and the ones that align with your habits and goals. Eg. You may be traveling frequently or looking to plan for your child’s overseas education.  You may look to diversify based on factors like outlook of various assets like equity, real-estate, bonds, commodities, etc; outlook of currencies, and how complementary it is with your current portfolio. Then decide what makes sense for you.

  1. The benefits of stocks in Global Markets

You can have access to global MNCs in sectors that are not represented in Indian exchanges.  Eg. The US stock market is home to some of the most desirable stocks in the world like Facebook, Google, Apple, etc; which opens up a more diversified investment avenue. One has the option of participating in global innovation and other themes from time to time.

  1. More options

Going beyond the US, you’ll find that different currencies and stocks perform differently at different times. Acquaint yourself with the indices, trends, and dynamics. Developed and emerging markets respond differently to economic turns. While many markets took a plunge, some recovered faster than others. For example, Libyan oil market was looking hopeful (subject to political volatility) and the Australian stock market saw a boom before the Wall Street sugar high in November.

Furthermore, it strengthens your portfolio, offers a wider horizon, helps manage risk better and can potentially enhance returns.

The pitfalls

It’s only fair if we discussed the downsides as well. Investing is tricky. Investing in multiple markets internationally gets trickier and more complex. Moreover, something that’s in hype currently may lose its momentum, and even deliver negative returns in the future. Before you head out there, ask yourself the following questions.

  • Does this align with my personal goals?
  • Which markets suit my lifestyle?
  • Can my wealth manager or myself track this investment decision with due diligence?
  • Am I aware of nuances like currency dynamics, trends, geopolitical correlations, etc?

Making the most of your global portfolio.

If you’re still contemplating your options, here’s a mental model to help you decide which assets and stocks will pay off for you. It’s called Warren Buffett’s “20-Slot” Rule.

In a lecture at a B-School he said,

“I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”

It’s quite evident that the winners usually are very selective. Selective focus helps you trim away good options and make room for great decisions. And, you can always consult a professional who has experience in global markets and whom you can trust when in doubt.