In most urban middle-class households with children schooling has become a major cost head. Personal finance experts quickly point out that while schools are more costly than they were 20 years ago, daily salaries are enough to pay for schooling. The problem is to fund university research, usually postgraduate research or master’s.
Although a large number of parents are conscious of the need to build a corpus for education, it is difficult for most parents to assess the cost of education for children. Two considerations make it difficult to quantify – firstly, it is a long-term goal and secondly, it does not know which path the child will select.
“It is all about assumptions now. So you should be focussing on what you can afford now,” says Pankaj Mathpal, founder and CEO of Optima Money Managers. For example, if you think an engineering degree is a minimum you would be willing to pay for, start with it. If it costs Rs 10 lakh, then apply inflation to it. “Education costs in Indian premier institutes are escalating at 10 percent CAGR and hence you should factor in that in all your estimates,” says Mathpal. If you expect your kid to take up specialisation overseas, you have to factor in that cost too. “If you expect your child to go overseas, do take into the education inflation in that country and the currency impact,” says Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors.
Although it may seem easy, do not forget to add additional costs for lifestyle. “This includes the cost of travel, hostel expenses which could be a large sum, if your child goes abroad or wants to live in a different place. Take that into account in your calculations, “says Ravindra Deshmukh, accredited financial planner and founder of Arthamitra Wealth Creators based in Pune.
It is probably best to begin saving as soon as possible for your child’s education. But you need a schedule and an accurate estimation of future costs to efficiently save. Here is how the amount you need to save for your child’s education will be estimated:
Step 1: Determine the time horizon
Time is the most significant consideration for investment. Determine how long (time horizon) you need to save based on your present age and the age at which you pursue higher education.
Step 2: Research the cost of education
Knowing the current education cost depends on where you live, your child’s level of education, and the type of college to which you go. In addition, decide if the child is pursuing undergraduate, graduate or post graduate studies locally or abroad and if the child is pursuing a private institution.
Step 3: Consider the impact of inflation
The government forecasts that the cost of training will increase more quickly than the cost of other services. This is important to take account of this higher cost due to inflation.
Step 4: Pick a rate of return
It is necessary to select a fair return on your investments. You will increase the rate higher than the inflation rate to preserve your money’s buying power. For instance, you might expect a return rate higher than the fixed installment rate of your bank in an equity mutual fund. Although the rates of return are not set, you can assume that a moderately risky mutual fund would deliver long-term returns.
Step 5: Calculate the required monthly savings
Lastly, you can calculate the exact amount you need to save monthly with the expected return rate and the final financial goal in mind. Use an online calculator to calculate how much you have to save to reach your goal every month.
Follow these 5 easy steps to help you calculate the exact amount of monthly savings you will need to meet a future target for your child’s educational needs.
