The first step in planning for your children’s future is to decide the things you want to fund for them.
Higher education and marriage are the usual suspects but here are some additional ones.
Study trips and hobby classes during the schooling years.
International vacation after completion of schooling.
Higher education abroad (preferably at Harvard or another of the Ivy Leagues).
A startup fund – incase they want to start a business.
Marriage Expenses (though more and more kids are saving on their own these days).
After you have made a list of things you want to finance for your child, you will need to find out how much the associated costs at present (i.e. how much do they cost today).
Here are some examples:
An MBA from IIM costs Rs 15 to 20 lakhs today.
An MBA from Harvard costs about Rs 1 crore.
An international vacation for a month costs a couple of lakhs.
These are the costs today. They will only become more and more expensive as the years go by.
That’s why you need to estimate how much you will need in the future.
Here is how you can do that with an example.
Let’s assume your child is 10 years old today and you would like to plan for his/her international MBA. You will need the money in 10 years time when he / she is 20 years old.
Cost Today: Rs 1 crore
Inflation: 5% p.a
No of years when money will be needed: 10
On account of inflationary costs, the MBA will cost about Rs 1.60 crores after 10 years.
This is target amount you need to have instead of Rs 1 crore. Most parents fail to take this into account due to which, they may face a cash crunch at the time of the actual expense.
To meet this goal, there are 3 ways to do it:
Invest a lump sum today.
Invest a monthly amount for 10 years.
Invest a lump sum + monthly amount for 10 years.
Here is how much you will need for each of the scenarios.
Lump sum investment: You will need to invest about Rs 52 lakhs today in assets which can grow @ 12% p.a. to give you Rs 1.60 crores in 10 years.
Monthly Saving: You will need to save about Rs 70,000 per month to get Rs 1.60 crores in 10 years @ 12% p.a.
Lump sum + Monthly: 15 lakhs invested today + a monthly sum of Rs 50,000 for the next 10 years will give you about Rs 1.6 crores.
Note: We have assumed 12% p.a. as a balanced return figure as your growth maybe higher in the initial years (more exposure to equity) and taper down as your goal approaches and more of your money is moved into a safer debt/income asset class.
If you had started planning when your child was just born, you would have needed only Rs 17,000 per month – That’s because you would have got an extra 10 years to compound your money to meet the goal.
So if you have children, take some time out with your spouse and discuss what you would like to do for them. And start saving and investing for those goals.
Here are some additional things you should keep in mind.
Do not buy ULIPs: Parents are lured by advertisement of various insurance companies, which promise to ‘protect your child’s future’. Never combine your insurance and investment needs together as it will cost you a lot more.
Inappropriate investment vehicles: Allocation towards growth assets such as equity and real estate is very important. Don’t put all your money in a Fixed Deposit if your goal is more than 5 years away.
Insufficient life cover: Your child’s future can never be fully secure, until you are adequately insured. Parents must buy a term plan that insures them for the value of child’s future goal requirement. If something were to happen to the parents, the child’s future goals will still be met via the term plan.
Ignoring your own retirement: Saving and investing just to make children’s future secure by putting your own future at stake is not recommended.
Procrastinating: There are parents who are not proactive when planning for their child’s future. Parents who start late will have less time to save their money and may not be able to save enough for their child’s future goal requirement.