Plan by setting a goal, allocating resources based on whether maturity is in 7 years or more than that
How many times have you heard people tell their children: “Son (or daughter), please postpone your master’s degree for another year as I don’t have enough funds right now”? The phrase perfectly describes the necessity of setting goals for your child’s education.
If you deep dive into the goals while planning finances, you can categorise them under two headers. The first is mandatory; the other comes with an expiry date. For example, if you are a salaried person, on your day of retirement, you can’t tell your boss: “Sir, please allow me to work for few more years, as I don't have enough funds to retire right now”. But if your goals include buying a house or property, foreign travel or luxury car, you can postpone the decision and decrease the fund.
In my opinion, the goal of educating your child is the second most crucial one after retirement. You need to plan and align asset class very carefully. There are some points you need to take in consideration before reaching out at goal value.
- If the goal is 7 years or more from today, you can consider inflation around 7-10 %, as education will require ample money in the coming years.
- If it is less than 7 years, then do consider the exchange fluctuation between rupee and dollar or any other currency, and keep a provision for that.
- The education goal is not only the amount of education you need to pay the institute, but also includes hostel fee, pantry or food and other living expenses.
Once you arrive at a desired amount, the second task is to map the selected asset to the education goal. As the goal is vital, one should avoid using a single asset class to map it. A balanced approach between equity and debt is ideal, especially if the goal is set to mature within 5-7 years, but if the period is more than 7 years, you can go with 70% equity and 30% debt.
Avoid parking money in any real estate asset class until and unless the goal year is over 10 years. Real estate is not a liquid asset class and may not fetch your desired returns in the coming years. You may also face difficulty selling the property in a short period.
In addition, you should also protect this goal with one education insurance plan or “vanilla” term plan, with a sum assured equaling the goal amount. Since we don’t know how uncertain the future is going to be, the term plan will protect against the risk.
The author is a CA and Founder, Fintoo
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.