Wednesday, 3 August 2016

Cost of Child Education – Planning and Calculator

Loving your child is what comes naturally but as a responsible parent you have certain obligations towards your child's future. No matter what, you will always want to do your best and ensure that funds are available at appropriate time to meet all those turning points in his/ her life such as higher education, marriage, etc. These milestones in your child's life are some of those very precious events and will always be cherished by you and your child if met well and on time.


But, you can only do so when you plan for such events well in advance and in a systematic manner. Saying so, the birth of your child is one of the most important phases in your life and this is when your responsibility as a parent begins. If you realize this and take the first wise step towards securing your child's dream from the very day, there will be no regrets.With you or without you, the regular inflow of funds to meet the financial obligations of funding your child's tuition fees,higher education abroad or a dream wedding should be timely funded for. That's when you will feel a sense of accomplishment and achievement towards the responsibility of your child.

You always want to be there to fulfill their dreams at every step of the way. But just wishful thinking is not enough and you must plan effectively to secure the future of your child. So, here are some factors that you must consider while planning
Must Read : Why Real Estate is a dull investment compared to Mutual Funds

The rising cost of education
The costs of education is constantly increasing. In the last 10 years, private school fees has gone up by 150% as per survey conducted by  ASSOCHAM (May, 2015).

Graduation and post-graduation costs are also going to increase drastically. 

Below is a table which shows the data for a private school in Kandivali in Mumbai for a child studying in STD : III. It may be less or more depending on the school which you select.


CostAnnual Cost- For One ChildAnnual Cost- For Two Children
School Fees4500090000
Shirt/ Trousers/ Skirts 25005500
Shoes35006800
Bag / Bottles15003000
Sports Kit20004500
Text books34007000
School trips 25005500
School Clubs15003000
Technology 15002500
Tution Coaching Expenses
Primary Level5,00010,000
Secondary Level25,000/-50,000
Extra Co-curricular Expense
Primary Level 3,0005,000
Secondary Level8,00010,000
Total79400202800

Child Education Planning
Increase in Education Cost of 1 Child with an Inflation of 5%
The total cost of education for a single year for STD III is Rs 79400 which calculated up to 10th Standard with an inflation of mere 5% comes to around 111723
Apart from the above it is clear that savings are not enough and you need investment where diversification is a must.

Must Read : Retirement Planning : Beating the Inflation Blues

Start Investing as early as possible

Indian Institute of Management Ahmedabad (IIM-A) has increased the fee for its flagship two-year postgraduate programme in management (PGPM) from Rs 18.5 lakh to Rs 19.5 lakh. Increase in 1 lakh fee is 5% inflation of Rs 18.5 Lakhs
Fees in IIM-A in 2011 was Rs 14.5 Lakhs. click here to find out the fees for various year in IIM.
If you looking to send your child for a post graduate degree abroad in a Institute like Harvard Business School cost is approximate Rs 96 Lakhs in present value

Source : economictimes.com

 A child in India normally completes graduation at 21 years of age and below are different scenarios depending on the age of child and funds required for a reputed institute like MBA in IIM-A after 5,10,15,20 years.
In my example i have selected MBA but it could be any Post-Graduation degree. You need to find the present cost today and future value with future value calculator (search in google there are hundreds of websites available) 
Let us understand the cost and investment required with the help of a sample case study: 

Must Read : Top 3 Large Cap Mutual Funds to Invest in 2016

Assumption made while calculating the scenarios 
Current Savings : NIL 
Increase in Yearly Savings : NIL  


Scenario 1 : Mr & Mrs Bajaj, a married couple with a child of 1 year
Child-Education-Planning-in-India


MBA cost after 20 years at an inflation of 5% would be Rs 51.73 Lakhs. Mr Bajaj would have to invest Rs 5625 every month in an asset class which would provide at-least 12% returns.

Scenario 2 : Mr & Mrs Sharma blessed with a kid of 6 years

Mr Sharma will have to save Rs 8518 every month for 15 years to accumulate a corpus of Rs 40.50 Lakhs calculated at an inflation of 5% and investment returns of 12%.

Must Read : Top 3 Mid Cap Mutual Funds Churning Money For Investors

Scenario 3 : Mr & Mrs Mehta with a single child of 11 years old and they have 10 years for their child to graduate and in the meantime they have to create the corpus of Rs 31,76,345/- at assumed inflation of 5%.

how-to-do-child-education-planning

Monthly investment of Rs 14000 is required which should fetch a return of 12% per annum adjusting inflation of 5%


Scenario 4 : Mr & Mrs Khan with a single child of 16 years old just completed 10th Grade and they have 5 years to accumulate amount of Rs  25 Lakhs approximate 


From the above scenarios it can be said that longer the horizon large the corpus required but with smaller monthly outflow 

Must Read : Why you should not buy ULIP

Achieve Child Education Goal with SIP


Child Age Time Available Instruments Inflation Future Value of Education Cost SIP required Rate of Returns
0-2 Years Over 15 Years Diversified Equity Funds5%4053910850012%
Stocks
GOLD Funds
3-6 Years 12-15 Years Diversified Equity Funds5%35019201136612%
Stocks
7-10 Years 8-11 Years Diversified Equity Funds5%28810381834812%
Balanced Funds
Debt Oriented Balanced Fund
11-14 Years 6-7 Years Debt Oriented Balanced Fund 5%2613186284668%
Debt Funds
Recurring Deposit
15+ Years <=5 Years Recurring Deposit 5%2370237420348%
Debt Funds
MIP
FMP


Reviewing your portfolio 

Once the above portfolio is in place, you will to have review it it at least once you also need to check check whether the amount required for meeting the goal has changed. "The education goal has two components: tuition fee and cost of living. Any of these could rise faster than expected. You need to find out whether the 5% per cent inflation rate that we have assumed is a realistic estimate" 

Must Read : Top 3 ELSS Tax Savings Funds in India to Invest via SIP 

Approaching the goal

The investment process is never the same, especially if you are investing for the long term. I have suggested equity funds for those with an investment horizon of over 12-15 years. However, five years before your goal, you should start shifting money out of equities to the safety of debt. Start a systematic transfer plan from your equity fund to a short-term debt fund (average maturity of 1-3 years). Keep in mind that the date of your child's admission for post graduation is fixed.

You can't let a downturn in the stock markets threaten your child's post graduation.



I hope you enjoyed reading the article , it takes time to write  articles with facts and figures, request you to please spread the word. A good way to start is to share this page on your social circle using floating social share bar on the left.

Who doesn't like a financial healthy life,In case if you want one contact me for Financial Planning, please do drop an email to me at vipuls1979@gmail.com. I would be happy to assist you

Mutual Funds & Insurance Related Articles :-
Benefits of SIP

What is SWP in mutual Funds
Best 3 Large Cap Mutual Funds for SIP in 2016 
Best 3 Midcap Mutual Funds for SIP in 2016
Best ELSS Tax Savings Mutual Funds for SIP in 2016
Why you should not buy ULIP
How to Select Mutual Fund for Portfolio
Liquid Funds are better alternative than Savings Bank account
What is FMP in Mutual Funds
Complete Guide on Monthly Income Plans
Complete Guide on Credit Opportunities Fund
How to Save Tax using Equity Linked Savings Scheme
How to Budget Your Money
How Much Insurance Do You Really Need
Why Should you buy Term Insurance Upto 60 Years
5 Must Have Insurance Policies for Women


Disclaimer  :-
The Article is only for information purposes and Vipul Shah (https://investkiyakya.blogspot.com) is not providing any professional/investment advice through it. The article does not constitute or is not intended to constitute an offer to buy or sell, or a solicitation to an offer to buy or sell financial products, units or securities. https://investkiyakya.blogspot.com disclaims warranty of any kind, whether express or implied, as to any matter/content contained in this article, including without limitation the implied warranties of merchantability and fitness for a particular purpose. https://investkiyakya.blogspot.com and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this guide. Use of this article is at the user’s own risk. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. https://investkiyakya.blogspot.com does not warrant completeness or accuracy of any information published in this guide. All intellectual property rights emerging from this article are and shall remain with https://investkiyakya.blogspot.com. This article is for your personal use and you shall not resell, copy, or redistribute this article , or use it for any commercial purpose. All names and situations depicted in the article are purely fictional and serve the purpose of illustration only. Any resemblance between the illustrations and any persons living or dead is purely coincidental.