Chasing goals using milestone plan

 

The education of their children remains an aspirational goal for every Indian parent. Every parent wants and strives to provide the best quality education and seeks to fulfil the dreams of their children. However, the burgeoning cost of education – both in India and abroad has been a cause of concern for the parents looking for higher education for their children.

While the cost of education in India has grown significantly over the past decade, the cost abroad is no better – owing to inflation in the local currency and rupee depreciation over the years.

Now, since education is getting expensive, it is critical to have a defined savings plan from an early age – something that is affordable for parents to keep aside and gives a runaway to accumulate. For example, if parents start to save for their child’s education immediately after the birth of the child, they would get a runway of 18 years for bachelors and 21-22 years for masters. Starting early would help the power of compounding to work in your favor and help you get closer to the goal with a smaller sum too. The amount kept aside for this defined and critical goal balloons with every year’s delay (see chart below).

	2020	2030
Cost of Tuition Fees (Rs Lakhs)	25	49
Cost of Living (Rs Lakhs)	10	20
Total (Rs Lakhs)	35	69

Note: Inflation considered at 7% for both tuition fees and living cost

Source: EduFund Research

Cost of delaying – SIP amount increases with every year skipped

Note: Return of 12% is considered for the SIP computation

Source: EduFund Research

Let us now see an example of two parents – Abhishek and Sneha.

The situation at hand –                                                        

Objective – To send child abroad for engineering education ·      Abhishek – Looking for Education Loan @ 8% ·      Sneha – Looking to invest systematically and accumulate corpus in 10 years, expecting returns of 12%

Abhishek and Sneha want to send their child abroad for engineering education when she turns 18. While Sneha believes in accumulating the amount by investing in a mutual fund every month, Abhishek feels opting for an education loan makes more sense.

Both Abhishek and Sneha has a 10-year horizon where Sneha would save for the period aiming to make 12% returns annually, Abhishek is looking to repay the loan borrowed at 8%. Let us evaluate which is a better plan –

The Results

Corpus required –

	2020	2030
Cost of Tuition Fees (Rs Lakhs)	25	49
Cost of Living (Rs Lakhs)	10	20
Total (Rs Lakhs)	35	69

Sneha’s investment plan –

Systematic Investment Plan (SIP) – Rs 30799 per month for 10 years

Note: Considering annual return of 12%

Source: EduFund Research

Abhishek’s loan plan –

Equated Monthly Instalment (EMI) – Rs 83716 per month for a time duration of 10 years

Note: Interest rate of Education loan is considered at 8% per annum, Tenure of repayment – 10 years

Source: EduFund Research

What we see is to reach her goal of global Education, Sneha set aside Rs 37K through SIP to accumulate the corpus. Abhishek, meanwhile, gets instant access to the corpus but ends up paying Rs 83716 as monthly instalments. Also, by the end of 10 years, he pays Rs 31 as interest making education cost rising 45%.

Both Abhishek and Sneha would have to make monthly payments, but Abhishek would pay substantially more every month. Abhishek would also spend much more on the same Education than Sneha.

When to use an Education Loan?

Despite starting to save early for a future defined and aspirational goal, a parent may still face a shortfall in the corpus. The reasons for the shortfall can be varied. For example, one instance could be because of the change in the nature of the goal. For instance, you might have budgeted for sending your child to Singapore but may end up sending to the US where the cost is comparatively higher. However, this possible shortfall is not an excuse but is a function of change in the plan. In such circumstances, it makes sense to fulfil the gap with an education loan. Also, it gets to avail a loan for part cost and not the full cost.

Is it possible to reduce your SIP initially and pull up?

Of course, yes, you can always go for a milestone planning where you can define a start-point, specific deadline and the final goal. This method ensures you map your SIP to your pocket size, and as time passes by, you tend to increase the outlay towards the goal. Thereby following an exponential roadmap rather than a simple straight line which may not be affordable in the initial years due to multiple other expenses.

To sum up, we can say the following –

• Based on the child’s currency age, a parent can start planning for higher education. This helps in being pocket friendly and remains disciplined for a defined liability that is due to come in a few years.
• Dividing the goal into smaller milestone and targeting each milestone helps the parent have a roadmap to the goal. This ensures a pocket, friendly method of investing.
• Education loan is available on short notice; however, it should be used to fill the gap instead of dependence for full corpus.

This strategy will allow you to fund your child’s education with minimal stress.