Tips on Saving for Your Child's Education

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It is every parent's dream to provide greatest education opportunities to their children, but the cost of offering that is huge. Your child's education expenses could burn a hole in your pocket.

Saving early and saving more would help in giving your children a high-quality learning experience.

Here's how you can save for your Child's education:

Know how much money you require to save

It is fairly important to find out how much you are going to need for your child's education. The best way to do this is to determine the costs for various educational milestones.

For e.g. Using the below mentioned simple Compound interest formula, one can actually find out the amount one needs to save to fund their child's milestone phases (higher education, marriage etc.)

Target Amount = Amount today X (1 + rate) ^ Tenure

Let us assume the current amount that funds one's higher education today is 10 lacs. Consider the inflation to rise by 10% every year. This amount is required after 25 years let us see what it becomes then.

Target amount = 1000000*(1+0.10)^25

This approximately equals to 1 crore. It is the amount that one would require to fund their child's higher education.

Start saving for your child at the earliest:

Your money under all savings plans grows via the power of compounding. An advanced start allows you to invest in lucrative investment avenues such as mutual funds and equities. Whereas, if you start late you cannot benefit by investing into equity; in that case, debt instruments are your only haven. For short term, investment in debt instruments is beneficial. Needless to say, the right amount in a controlled and proper manner has to be invested so as to end up with a relevant amount (by factoring in inflation) on maturity

To attain your goal, you could put your savings into:

  • Shares
  • Managed funds
  • Term deposits
  • Savings accounts
  • Education funds

Be Risk averse:

Usually, while saving for your child's future, one forgets to take into account risks and uncertainties like inflation. To outdo the rising of inflation, let some equity be a part of the portfolio.

How much of your child’s education fund should be into equity related products have to do with your ability to take risks? The thumb rule for finding out about asset allocation is to deduct one’s age from 90.The outcome (90 minus your current age) is the percentage of the total assets that can be invested in growth-oriented products (equity and equity related) while the rest should be invested into assets (debt and other fixed instruments) which are safe and liquid.

Know where to put your funds:

Your age determines how much of your savings should be put in equity and how much of it should be allocated in debt and income instruments

PPF is good enough to be considered as one of the safest investment options. A regular year-on-year investment of Rs. 20,000 in to the PPF account can give out Rs. 5.86 lakhs at the end of 15 years, a decent amount to save if begun at the time of birth of your child.

Other secure investment options include fixed deposits, traditional insurance policies, debt mutual funds and post office savings schemes (with an expected return of around 7 per cent).

In the case of growth oriented investments, you can consider equity funds (diversified and tax saving funds) and equity shares where return of at least 15 per cent is expected. Some amount of risk is involved here. But it can be lessened if you choose large cap stocks and diversified funds.

If you take the insurance route, start early. This will ensure low premium and better risk coverage. Also don't forget to compare child education plans, as comparing will help you choose the best plan.

Switch funds:

Once your child attains the age of 13 to 14 or is starts to inch closer towards a major milestone, it is advisable to pull out funds from growth investments and put into safer fixed income avenues. For example, if you experience that the market is performing extremely well, (like it is nowadays), take out your holding in stocks and mutual funds and invest this fund into a fixed deposit. This won't disrupt safety and liquidity for your funds at the time when you need it.

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