How to save for your child’s college? Where, how, and how much?
Saving for your child’s college education is a financial project in its own right. It requires planning, research, investing, and consistency. There are several things you need to do to ensure you have the necessary funds when you need them. Let’s understand why you need to save before understanding where, how and how much!
Why saving for your child’s college is important?
The reason why you need to save is education inflation. Just to give you a heads up on the costs, as of 2022, a four-year undergrad course in the US can cost you anywhere from Rs. 70 lakhs to Rs. 1 crore, while a 2 year’s masters will cost you Rs. 60-70 lakhs.
Other countries are comparatively cheaper. So, if you start working with the US figures, you are fairly well taken care of for the other countries.
Yes, the amount may seem huge and it will keep going up over the years, but if you start well in advance, you will have the power of compounding working for you. And with the right investment strategies, putting together the corpus you need is quite achievable.
How to start saving?
1. Collect information
· Start Early: Your kid is bound to go to college, whether in India or abroad so start early!
· Select the country: Pick a country that you know you will be comfortable sending your child when the time comes.
· Identify the universities: Get a handle on the kind of universities you would like to send your child to, work out ballpark numbers in terms of fees, years of study etc.
· Talk to your friends: Even if your child is really young yet, start speaking to parents who have recently sent their children overseas. There are several insights that you will get when you speak to someone who has actually walked the path you wish to traverse.
2. Chat with a financial planner
· Talk to experts: Once you have a fix on the funds you need to accumulate to send your child overseas, have a serious chat with your financial planner.
· Set your goals: Define your goals, and strategies that will help you put together the corpus you will need and exceed it by a bit as well.
· Plan your funds: Take inflation, currency exchange rate, rising education and travel costs into consideration.
3. Choose your investment instruments carefully
· Long Term Investments (12 – 15-year horizon) You can consider investing in equities, and stocks. These instruments can give you high returns as the stock market grows over the decade. But these are also high-risk investments.
You must have the patience to stay invested even when the market indices fall, for ultimately, they do go up. That is why you need a longer horizon to invest in these instruments: so, you can wait for the markets to correct and get the best return on investment. You can also balance the risk with investment in a provident fund, which gives one of the highest rates of return in the fixed return market.
· Mid-Term Investments (7–11-year horizon) If this is your investment horizon, Mutual funds are your best bet. You can choose a basket of mutual fund schemes that are best suited for your kind of risk appetite: there are funds that invest in equities, small-cap, mid-cap, and blue-chip companies, and also debt funds. The last two are quite safe and give you better returns than the standard savings or Fixed deposit options.
You must note that mutual fund investments are dependent on the market movement and will be impacted by the rise and drop in the indices. But compared to Equities, they are less volatile and the good ones are known to outperform the market index over a long period of time.
· Short-Term Investments (4 – 7 years) If you will be requiring the funds within the next few years, you must invest carefully ensuring your capital is protected at all times and the investment can earn you some additional benefits beyond the Fixed deposit rates.
You can invest in debt instruments and bonds directly or invest in debt mutual fund schemes. These are quite safe and can earn you better interest than your regular savings options. But do keep in mind, that most of these also come with a lock-in period, so check that out before you commit your money.
Apart from the capital market instruments, families also look at the traditional avenues of investment to block their monies. Real estate, gold purchases, gold bonds, and real estate mutual fund schemes are some of the other options that can be considered for long-term investments.
Financial planning can be tricky if you are just starting out. With so many saving and investment opportunities, it’s important to understand which ones will help you get to your goals faster. So, don’t shy away from seeking help and building a strong saving plan!