One thing I really wish I had known and understood at the start of my career was the basics of financial planning. A 20 something, I knew about various financial products such as savings, deposits, loans (I had taken an education loan), as well as insurance. In fact, soon after joining my first job, I took a life insurance policy and over the next few years got myself well covered.
However, what I didn’t know much about was goal based systematic financial planning. It wasn’t as if we didn’t invest, we did – but not in a consistent, cohesive manner. A big chunk of my salary in those early days was going towards the home loan (a financial decision my husband and I were happy about), there were some random ULIP’s and some mutual fund investments here and there, some recurring deposits, on festivals we would buy some gold and so on. After the birth of my first child, I took a child plan as well.
But we were not saving money in a systematic way. Ten years into my career, I can’t say I didn’t know what financial planning was, but by then, some amount of procrastination had set in. Yeah, I will do it, we still have time – was how I wasted many years. I was jolted out of this slumber when my twins were born, and we found out that one of them had special needs. I realized that the time to act was NOW. This was when I consulted a financial planner and we did a full analysis of our income, expenses, assets, liabilities and future financial goals. We needed at least four main buckets – i) a retirement fund for ourselves; ii) Arnav and iii) Abeer’s education and finally iv) a corpus for Anvay which could be used for his medical needs/education/future use. I knew that there was no way we were going to achieve this if we didn’t start planning the right way. And I also knew that we had lost precious years by now and had we started to save earlier, we would already have had a decent corpus by now.
But as my financial advisor said, it is never too late and better late than never! Finally, I had come to my senses!
As you can see, with three kids, putting away money for their education was a key priority area and we decided to start multiple SIPs for the purpose. So, let me share some of what I have learnt on the way so that you can also START your children’s future planning NOW.
- Understand the various investment options
There are a range of investment options available and ideally one should arrive at a good mix of savings instruments, insurance, mutual fund and equity portfolios. Make sure you are adequately insured – since the loss of an income earner can jeopardize education plans of your kids. Have a mix of term insurance and endowment plans. You could also consider child plans that give you a lump sum at the end of the premium period, however, do keep in mind that these are primarily insurance policies and their returns will never match those of mutual funds and will not be sufficient on their own.
One of the best ways to save for your child’s education is to invest through a Systematic Investment Plan (SIP). A SIP works best for all kinds of professionals – salaried or business because you only have to invest a small amount at regular intervals.
- Estimate the expenses
I am not sure if you have noticed, but the costs of higher education have skyrocketed both in India and abroad in the last decade. There are the twin risks of inflation as well as the continuous rise in course fee (which is higher than inflation) I found a great article analysing the cost of education in India and you might want to have a look here.
Estimating the right expenses are a very important part of planning the corpus. Pankaj Gera, CFA (ICFAI), CFP, has seen many parents go wrong on this, “The two most common mistakes parents make while planning a corpus for education of their children are:
- Ignoring the Impact of inflation on education cost
- Planning for higher education in India while the child’s aspiration is for international education”
Hence do make sure that your calculation is done carefully. The L&T Mutual Fund website is a good resource for calculating the expenses for your child’s education. A very interactive page where parents can fill in various details about their childand can get an estimate on how much they need to invest monthly to prepare for their child’s education. The user will even get a report mailed to them.
Once you have estimated the corpus you need, and the time horizon within which you need to save, you can calculate the monthly amount you need to invest in SIP. The L&T Mutual Fund website also has a great SIP calculator that you can refer to.
- Start early
The earlier you start, the better it is because this is when you can really benefit from the power of compounding. What it simply means is that you not only aim to earn returns from your initial principal investment, you also aim for returns on the accumulated returns on the initial investment.
Regularly investing small amounts over the long term leads to the accumulation of a large corpus which can be very useful at a later date. For example, assuming a return of 12%, and a corpus requirement of INR 25 lakhs, you need to save INR 6,700 monthly if you start when your child is 5 while if you start when your child is 11, you will have to shell out INR 19,000 a month!
Akta Sehgal, founder, Manas Management and Kiddo Mentoring, firmly believes in starting as early as possible. According to her, parents should start saving and investing for their kids’ education as soon as they start their baby planning and if not then, then definitely as soon as the baby is born. She believes that the contribution gets significantly impacted if we miss these early years. She says, “Imagine how great would you feel if you already have a portfolio of a few lakhs by the time your baby is four or five!” Her advice is to plan the investment with growth in mind and invest in growth oriented products with discipline. “You will be delighted if by the time the child is ready to explore new horizons you are financially ready to support without pressure and stress. This will be the best gift you ever give your kids and yourselves”
Don’t put all your eggs in a single basket. I am sure you would have heard this. Instead of investing in just a single fund, diversify your investments across at least two or three different funds as that lowers the risk of investment. Diversify across different fund managers, diversify across large cap, mid cap and small cap funds, and finally get a good mix of debt and equity funds. This will help manage volatility since pure equity funds will aim to give higher return in the long term but are also more risky.
I hope you found some of the information in this blog useful and are encouraged to start saving for not only your child’s education but also your other life goals such as retirement etc. Do share your tips and suggestions if you have any and share this post to make more people aware.
Disclaimer: This information is for general information only and does not have regard to the particular needs of any specific person who may receive this information. L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates; does not guarantee/indicate any returns/and shall not be held liable for any loss, expenses, charges incurred by the recipient. The recipient should consult their legal, tax, and financial advisors before investing. The recipient of this information should understand that statements made herein regarding future prospects may not be realized or achieved.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
Thanks so much for reading! Please comment, share and spread the word!
Regards, Sakshi aka tripleamommy
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Disclaimer: This information is for general information only and
does not have regard to the particular needs of any specific person who may
receive this information. L&T Investment Management Limited, the asset
management company of L&T Mutual Fund or any of its associates; does not
guarantee/indicate any returns/and shall not be held liable for any loss,
expenses, charges incurred by the recipient. The recipient should consult their
legal, tax, and financial advisors before investing. The recipient of this
information should understand that statements made herein regarding future
prospects may not be realized or achieved.
Mutual Fund investments are subject to market
risks, read all scheme related documents carefully.