INVESTING FOR CHILDREN

Children are the future of our country and indeed of the world.

 

On the occasion of children’s day, it is very important that parents think about planning for their child’s future and take immediate action steps.

 

In today’s competitive world, education is the only game changer.

 

Providing for the basic, college and full professional education for your child is a your primary duty.

 

Let’s understand how you should do this using the following 3 steps:

 

1. Quantify the current expenses for education

 

Start with basic education:

 

Note down the cost of school fees, cost of books, uniform, daily traveling, school activities, tuition classes. Add 10 % of this total as miscellaneous expenses (which could be the cost of field trips or any other school event during the academic year)

Assume this is Rs X

 

If you think that the pre-school or school in your area might ask for a one-time lump sum donation, then factor in that as well. Assume this is Rs Y

 

So, the total cost at the minimum would be Rs Y + 10 X (10 times “X” is the total cost for the entire 10 years of schooling)

 

(Tips: you must make enquiries with the school to get the total cost and you could also check with a few parents in your area, whose children are studying in the school to ensure that your calculations are realistic and correct, you can check on the internet as well)

 

Next step is college education:

 

Note down the cost of college fees, cost of books, daily traveling and coaching classes

Add 10 % of this total as miscellaneous expenses (which could be the cost of field trips or any other college event during the academic year) this will give the cost per year.

 

Double this cost to factor in 2 years of junior college (std 11 and 12)

 

Assume this is Rs 2A

 

(Tips: you must make enquiries with the college to get the total cost to ensure that your calculations are realistic and correct, you can check on the internet as well)

 

 

Final step is professional education:

 

(This could be engineering, medicine, dentistry, architecture or chartered accountancy etc)

 

Note down the cost of college fees, cost of books, daily traveling and coaching classes

Add 10 % of this total as miscellaneous expenses (which could be the cost of field trips or any other college event during the academic year) this will give the cost per year.

 

Multiply this cost by 4 years (in case of engineering) or by 5 years (in case of medicine)

 

You could also add a one-time lump sum cost if you think that you may have to pay donation to get your child admitted.

 

(Tips: you must make enquiries with the college to get the total cost to ensure that your calculations are realistic and correct, you can check on the internet as well)

 

Assume this is Rs 4B (if engineering) OR Rs 5B (if medicine or architecture)

 

 

So, your total current cost is Rs Y + 10 X + 2A + 4 B

 

 

Note that in some cases, parents may want their child to get a Masters degree as well in the professional field. This will entail minimum 2 more years of study.

 

Using the same technique as given above, you have to add the total cost for 2 more years of study (i.e.: Rs 2C)

 

In that case, your total current cost is Rs Y + 10 X + 2A + 4 B + 2 C

 

 

2. Assume a standard inflation rate for the future

 

It is conservative and safe to assume a standard inflation rate of 10% per year for the increase in the cost of education in India.

 

 

3. Decide how many years from today would you require this money

 

This will vary for each parent and each child.

 

Example: A parent with a 1year old child may need money in 5 or 6 installments:

 

  1. 3 years from today, he may need Rs Y (one-time lump sum donation for school entry)
  2. 7 years from today he may require Rs 10 X (this 7 years is the average time required, once his child enters school, he requires money every year to pay for school expenses)
  3. 15 years from today he may require Rs 2 A for the junior college education cost
  4. 17 years from today he may require Rs 4 B for the professional education cost
  5. 21 years from today he may require Rs 2 C for the Master’s degree education cost

 

 

4. Based on the current cost, inflation rate and the number of years from today when you require this money, one can calculate the total future cost and the money required at various intervals of time in the future as per the above time-table

 

You can do this yourself at home using a PC loaded with MS Excel program OR you could approach a financial planner who will help you develop this future cash flow table OR you can scan the internet to see which sites have ready made calculators for use.

 

Once you do this you will know the future cost of education for your child.

For more than 1 child, you can similarly repeat this exercise precisely OR multiply the future cost obtained by the number of children.

 

Now, the million-dollar question is how will you generate this kind of money?

 

You must discuss with your spouse and your financial planner the ways and means to maximize your monthly savings and develop a monthly systematic investment plan (SIP) by carefully selecting good performing stocks OR good performing balanced mutual funds OR diversified equity funds and then invest regularly every month in a disciplined manner to achieve your goal of funding your child’s education expenses.

 

Happy investing!

 

prashant.mehta@acm.co.in

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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