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How to plan for your child’s education, as defence services personnel

Your child’s education is something that a lot of your savings and investments will be geared towards. The fact that you can look forward to a pension post-retirement makes the decision-making process a bit simpler.

Our families form perhaps the most important reason why we save and then invest. As a defence services personal, your families make quite a few sacrifices to support you. It is thus only natural that you would want to support their dreams and aspirations as much as you can.

Your child’s education is something that a lot of your savings and investments will be geared towards. The fact that you can look forward to a pension post-retirement makes the decision-making process a bit simpler. You can allocate far more of your savings towards educating your children than you would have if you also had to save for the entire retirement corpus. No matter what your child wants to study, you would want to support them to the best of your ability.

What you need to keep in mind at the very outset

1. Education inflation is higher than general inflation

Our research has shown that education inflation trends towards double digits and 12% is a good assumption for the same. This will have a direct bearing on how much, and for how long, you have to save and where to invest. Today, a typical IIT charges almost Rs 3 Lakhs annually in fees. Studying abroad, especially in the US, for undergraduate courses can set you back by multiple crores. While education inflation outside India may be potentially lower, the costs even then would be quite significant.

2. You have to balance your current expenditure on your child’s education with what you plan for college

If you are among those that have sent or are planning to send your child to a good boarding school, then you must have a fair idea of the costs involved. While it is definitely a good investment towards your child’s future, this can potentially affect how much you can save for your child’s higher education.

3. You will have to start early

Considering point 1, the earlier you start planning, saving, and investing for your child’s higher education, the lesser will be the savings burden and the more likely you will be able to meet your goals. 

An SIP (Systematic investment plan) of Rs 10,000 in equity funds giving about 11% per annum for 10 years is likely to yield about Rs 22 Lakhs. If the same SIP were for a period of 15 years you are looking at a final sum of Rs. 45 Lakhs. Even if the SIP amount were Rs 8000 for 15 years, you would still end up with Rs 10 Lakhs more than if you saved and invested for 10 years.

While education inflation outside India may be potentially lower, the costs even then would be quite significant.

So what’s the action plan?

SIPs and a portfolio of good equity mutual funds can make the seemingly tall order of saving multiple lakhs for your child’s higher education a readily achievable reality. Here’s how to begin:

Consider multiple higher education options and list down the fees today. If they are in India, consider inflation of 12% and assess the costs in the year your child is likely to go to college. If they are outside India you can consider the dollar-denominated inflation values. A good thumb rule is about 2% inflation for education outside India. You can use multiple calculators, such as this one for the same.

Once you have a rough estimate of the amount that will be required, consider the time you have to save up for it. An ideal starting point is 15 years before your child will need to go to college. Even 10 years is a decent time frame.

Depending on the amount required, start an SIP in good equity mutual funds. A portfolio of 2-3 schemes which allow you to invest across market capitalisations is best suited to deliver the inflation-beating growth you will need to reach your goal. Make sure that the SIP you are planning for is going to be enough. So if you need 20-22 Lakhs, in 10 years, a Rs 10,000 monthly SIP will do the job for the most part.

Student loans

In the event you believe the amount required may be more than you can save for, try and save as much as possible and combine it with an education loan that your child can then pay off once they are employed. The more you can contribute, the lesser will be the loan burden. 

For education abroad, your child will quite likely need a student loan, in addition to what you can save and invest for as saving up the required total corpus is a challenging task for most. Consider your own finances and do speak to a registered investment advisor or a qualified financial planner for this.

Keep in mind

You will need to balance your own needs post-retirement as well as your other financial goals while saving and investing for your child’s higher education. While you will have the benefit of your pension, do not aim for something that will leave you absolutely dependent on the pension. You will need to have a good retirement corpus if you do not want to sacrifice your lifestyle.

Discuss this goal just like other financial goals with your family and take professional advice should you feel the need to do so.

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