Five steps to financing your child’s education abroad
For most parents, sending their child abroad is a herculean financial task, with even lifelong savings not being sufficient for many. However, with proper and timely planning, you can ensure that your lack of finances do not stand in the way of your child's educational dreams. Here are five steps that you need to follow:
Estimate the expected total cost
If you have a young child, then finding out what the school costs today is easy but deciding what rate of inflation to assume to see what it's going to cost in the future can be hard. Often schools don't inflate their fees much on an annual basis, but will suddenly implement a jump in the fee, every few years. This comes to a higher average rate of inflation. You might find that tution fees increase anywhere between 8% and 12% on an average annual basis. It's easy to say - take the conservative assumption for your planning, but the difference can be huge.
Suppose a school charges Rs. 25 lakhs (assuming INR) today and your child will likely attend in 5 years. With 8% annual inflation, fees in 5 years will be Rs. 36.73 lakhs.
With 12% annual inflation fees in 5 years will be Rs. 44.05 lakhs. That's quite the difference, and planning to build a corpus of Rs. 44 lakhs may not be easy for everyone. Consider assuming a conservative rate of inflation and allow yourself a buffer. You can assume 10% annual inflation on education and create a plan for your child's education accordingly.
Decide upon the source of funds
Next step is to decide on how to go about funding this cost and also the proportion of your contribution in it. While education loan is an option, keep in mind that most lenders usually fund about 85% of the course's cost, implying that the margin money of at least 15% would have to be paid by the family. You could solely fund through timely investments in mutual fund SIPs, or partially invest and take education loan for the rest. This would depend upon the number of years your child is away from reaching the age of 18.
Start investing as early as you can
No matter what your child's current age is, start investing as soon as possible, to accumulate a good amount of corpus. The more you delay, higher would be the chances of non-accumulation of desired corpus, or your finances would be highly strained in order to achieve that corpus.
For instance, if the expected total cost of sending your child abroad is `1 crore, and your child is aged five years currently, implying you have an investment horizon of 13 years ideally. So, an equity mutual fund SIP of about `26,000 monthly would suffice, with expected returns of 12%. Whereas, if your child is currently aged 12 years, availability of lower investment horizon of just six years would push up your SIP amount to `95,000.
Review investments periodically
Parents must keep reviewing their investments periodically, ideally at least once or twice a year, by comparing the mutual fund's performance with their peers and benchmark indices. Periodic review would assist in spotting the non or under performing funds, and these can be timely replaced with better performing funds, to prevent any damage or hindrance in creation of desired corpus.
Invest Smartly for your Corpus
Since accumulating the corpus would involve an investment for 10-15 years, you wouldn't want to take any risk with your accumulated corpus, as you approach the goal. The volatile nature of equity mutual funds often necessitates the need to shift your corpus to less risky investment avenues. Suppose your investment horizon was 15 years and you are just 2-3 years away from reaching your goal, consider shifting your accumulated corpus into savings account or debt mutual funds, since these provide high degree of liquidity and safety. High yielding savings accounts are offering interest rates up to 7.25%, along with the highest form of liquidity.
Remember to Insure Yourself Adequately
It's not one of the fifth points BUT the most important one for every parent to remember. One of the biggest potential setbacks to a child's education is the demise of the breadwinner in the family and the lack of insurance. Ensure that you have enough life insurance by way of a simple term plan to cover at least the tuition fees of the school your child will possibly attend. If insurance is invested correctly and grown safely, your family life goals can still be achieved. But that can only happen if you have the right amount of insurance for your family's goals and regular expenses to still be met.