Plan to fund your child's education now!

It is reasonable to worry if you haven’t planned your child’s education expenses at a young age. The cost of education may become unaffordable when your child is ready for higher studies.  You may have to take a loan to fund the studies which may take ages to repay. Or your child will start repaying after getting a job.  If you haven’t planned for your child’s education, then the fire of inflation in education costs can bother you more than food and drink but here’s a way you can build a big corpus by adding small amounts so that you don’t have to worry about your child’s education expenses.

Retail inflation has been around 6% for the past few decades,  while the cost of education is increasing at a rate of 11-12%. This means that the cost of education doubles approximately every 6 to 7 years.

According to a report released by the BankBazaar in 2023, the cost of a two-year MBA program in a leading business school which  was Rs 3,00,000 in 2003, increased to Rs 16.6 lakh in 2013 and Rs 24.6 lakh in 2023. The annual inflation in education expenses during the 20 years has been 11% .

Assuming 11% inflation in education, the fee which is Rs 24.6 lakh in 2023 will increase to Rs 41.45 lakh in 2028, Rs 69.8 lakh in 2033, Rs 1.17 crore in 2038 and Rs 1.98 crore in 2043.

If your child was born in 2023 and is now one year old and takes admission in MBA at the age of 20 in 2043, then you should have approximately Rs 2 crore for his 2 years of study. It is not easy for a middle-class person to arrange for a sum of Rs 2 crore at once.

It is difficult to determine what your child will study 15-20 years from now. But there are some basic questions for which you should have answers, such as – how many years later will he need money for higher studies, the future cost of the course you want him to study, you will have to calculate using an inflation calculator. An inflation calculator adds your current expenses according to inflation and tells you its future cost. Suppose inflation increases at a rate of 11%, then for a course that costs 1 lakh rupees today, you will have to spend 2.84 lakh rupees after 10 years.

It is very important to start education fund accumulation in time. The sooner you start investing, the more time you will have for your money to grow through compounding. Even a small investment made consistently can transform into a large corpus over time.

Choosing the right investment option is the most important. There are many investment options available such as equity mutual funds, Employee Provident Fund (EPF), Public Provident Fund (PPF), Fixed Deposit (FD), and investment options like Sukanya Samriddhi Yojana for the daughter.

In equity mutual funds, you can expect a return of up to 12% over the long term. EPF has an interest rate of 8.25% for the financial year 2023-24. PPF offers 7.1% annually, bank FDs offer 7 to 8%, while the Sukanya Samriddhi Yojana offers an interest rate of 8.2%. You need to choose an investment option that can beat inflation.

Returns in equity mutual funds are not fixed, they depend on market conditions. However, good returns are expected from equity mutual funds in the long term. Suppose your son wants to do MBA in the year 2043-44 and the inflation rate of education expenses is increasing at 11% per year, then at that time, the cost of MBA will be approximately Rs 2 crore. Tto accumulate this expense, how much investment do you need to make every month. Let’s understand this.

The target amount is Rs 2 crore, investment duration is 20 years and the estimated return is 12%. According to this calculation, you will need to start a monthly SIP of Rs 20,000 in equity mutual funds. During this period, you will accumulate a total of Rs 48.50 lakh and earn a return of approximately Rs 1.5 crore on this.

When you invest for a goal like education,  along with adding money, you also need to devise a strategy to withdraw this money in time.

If you don’t have a large amount to start SIP, there is no need to worry. Start investing with an amount that you can afford every month. As your earnings increase, keep increasing the SIP amount. For this, you can choose the option of step-up or top-up SIP when starting SIP.

Invest not only for your child’s education but also for any other goal. Don’t forget to review your investment strategy at least once a year. When we plan for long-term goals, we also have to face many ups and downs in life. Therefore, for financial risks such as job loss, serious illness, or death, ensure adequate coverage of term and health insurance so that your planning stays on track.