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Smart Ways To Plan For Your Child’s Future And Education

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Smart Ways To Plan For Your Child’s Future And Education
NV Subramanian - 20 August 2019

Parenting is more complex than ever before. There is competition in almost every sphere of life. The lifestyles that we lead and the cost of living---everything has moved up the ladder. It is thus of no surprise that one common question that bothers almost every salaried parent nowadays is whether or not they will be able to rightfully handle the expenses required to shape up their child’s future in the long run and in turn, be able to fulfill their child's dreams.

Education is one of the most important priorities for any parent for which they are always willing to stretch their finances so that they can give the best exposure to their child. This is more so when today there are multiple choices and many possible paths a child could explore when it comes to pursuing traditional and new age vocational educational courses before they embark upon a career path. With the spiralling costs of schooling, college, coaching and extra-curricular classes, planning for your child’s future and education is on top of everyone’s priority list. Coping up with rentals or property related repayments, household bills and cost of living is challenging enough- additional cost for taking care of education fees adds onto the pressure.

Unfortunately, state delivered education including skilling and vocation training provided by the government continues to be questionable. The only alternate available for parents is private education, which is expensive. In general, the education sector is witnessing an inflation rate of about 10-12 per cent year on year. No wonder, salaried parents more often than not find it difficult to cope up with the costs associated with private education. Even the private schools and colleges in India charge fees anywhere between Rs 50,000-5 lakh per year.

Moreover, unlike most basic necessities like house rent, power, milk and cable bills, education fee across the globe is never payable monthly! The fact that it needs to be paid upfront - quarterly, semester wise or annually immediately affects the cash flow and gets in the way of savings. The situation has become worse since India’s education loan market shrunk by almost 25 per cent in the last four years. The financing solutions available for salaried parents ate expensive and cumbersome. Banks avoid segment of loans below Rs 4 lakh without collateral and favour handing out loans of higher value. The need to enroll in new-age courses leaves students and their parents with little choice: they either pay education fees from their hard earned savings or opt for loans at high rates of interest.

It is time for parents to break away from some common patterns and adopt simple yet smart ways to plan for their child’s future and education needs. A typical salaried parent in India usually saves close to 30 per cent of their income versus spending it deliberately unless necessary. One of their major pain points are the challenges which comes with spikes in cash outflows, whether in the form of unexpected expenses like medical and family weddings or regular, lumpy expenses including education.

Just the way insurance is used in mitigating expected or unexpected medical expenses, parents could approach managing their expenses and wealth.

- A practical and viable option is to handle education expenses monthly, a step which would make the entire planning process easier for parents and students. Market intermediaries and service providers like Payed could step in to facilitate monthly payment of education fees by closely engaging with schools and colleges in India

- Once their expenses get more manageable, parents can choose liquid funds over savings bank account, and earn 6-7 per cent interest without locking money in FD

- It is imperative for salaried parents to start an early planning especially when they are saving for a long-term goal. Start the process when a child is three or four years old. That gives parents at least twelve to fourteen years to save and plan their resources. The multiplier effect in the power of compounding comes from investing time horizon; longer time horizons have a higher multiplier effect. Leveraging SIPs, Mutual Funds and Recurring deposits plays a pivotal role in further improving cash returns. Leveraging monthly income plans (MIPs) from mutual funds can be a good alternative for those who would like to stay away from risks of any sorts. These funds put only 15- 20 per cent of their corpus in equities and are therefore less volatile than equity or balanced funds.

- For the debt portion, parents could start a recurring deposit that would mature around the time their child is scheduled to apply for college. Those in the highest 30 per cent tax bracket should avoid recurring deposits and start a SIP in a short-term debt fund, which give almost the same returns as fixed deposits but are more tax efficient if the holding period is over three years

- Investing in affordable housing schemes and help parents avail Rs 3.5 lakh worth tax exemption, a step which can further help them to create wealth for times ahead

Children are a family’s lifeline, so parents ought to plan wisely. Be open to trying newer, more viable payment options being offered by market intermediaries to ensure a comfortable and secure future for children. Starting early always helps so it’s best for parents to not delay and start preparing a fool-proof plan today.

The author is the Founder and CEO at Payed

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