An average parent spends roughly 60-70 Lakhs for raising a child in his initial 20-22 years since birth. This is one of the considerable expenses you, as a parent, will encounter before your retirement. Besides retirement, a significant financing event is raising a child with a good education.
The cost of this expense - food, clothing, electronics, education, etc. has been on the rise, and average inflation across categories is 6-15% per year.
Let us see how the share of expenses changes as a child grows from an infant to an adult.
Category 0-4 years 5-8 years 9-12 years 13-16 years 17-21 years Total Education 20% 44% 48% 52% 74% 59% Healthcare 16% 7% 6% 6% 2% 5% Food 12% 7% 7% 6% 2% 5% Clothing 15% 10% 9% 8% 2% 6% Others 37% 32% 30% 28% 20% 25% Amount Spent Rs 5-7 Lakhs Rs 6-8 Lakhs Rs 8-10 Lakhs Rs 10-12 Lakhs Rs 34-36 Lakhs Rs 66-68 Lakhs Source: EduFund Research Team
As you can see in the table above, an infant needs attention, good healthy food, and medical care in the initial years. Thus, the expenses are on the higher side.
As the child grows, the expenses of clothing and education start to come in, whereas health care starts to taper down. Gradually the clothing expenses also start getting optimized as the usability of clothing increases with age.
As the child enters high school (or the secondary class, which is class 8 onwards) and then moves to college for professional courses and higher education, the expenses start to skyrocket.
While these expenses are alarming, what is more, alarming is the under-preparedness for such inevitable life expenses. Also, it is implicit to note that the expenses will only go north with inflation in categories rising. One should accept that inflation is real and not imaginary.
So, how should you tackle these expenses?
Well, the only answer is Saving by Investing. When we say saving by investing, it is crucial that you have a Systematic, Disciplined, and Rationalized approach to investing.
How to plan?
An individual must plan all the bigger child's expenses, as shown in the table above. But you can only do justice with some goals simultaneously, given other expenses that an individual will have at the start of the career.
Thus, to tackle this, one must take a rational approach in prioritizing the expenses and categorizing them into short-term, medium-term, and long-term goals.
Short-term goals – In this you have goals that need high capital protection and may arise anytime during one year. For example - some emergency corpus for child's medical care.
Medium-term goals – For the medium term, you have all goals that have over three years to achieve. For example - when planning for school fees of an infant, a parent has a medium-term plan for play school fees and fees for a K-12 school.
Long-term goals where you have time by your side, and you could take high risks. This will be school fees for standard 8-12 (assuming you are planning when the child is an infant, undergrad college fees, and post-grad fees.
How do you plan for these goals?
Once you categorize the expenses as per priority and time horizon, have a dedicated plan for each of these baskets.
How could you achieve it?
Let us see the example of the emergency corpus of Rs 1 Lakh for the child's medical treatment.
Emergency funds for a child should have a feature of high safety and high liquidity. Thus, you must invest your savings in a safer fund with high liquidity to achieve this goal.
Debt funds are the best option for such short-term goals as they are significantly less volatile.
Let us now see the example of medium-term and long-term goals.
For medium to long-term goals, using a goal-based approach for your child's education helps you stay ahead of the curve. Let us see the example of higher education.
Apart from fees, there are expenses like accommodation, food, clothes, transport, etc. The fees portion only consists of almost 40-50% of the total expenses during the course duration, and the balance is spent on other items.
Cost of higher education.
Source: EduFund Research Team
Once you have the total cost of education (in current value), find out the expense that you will incur in the future. For example – if your child is just born, you have good 18 years when the child will be ready for college.
Note: Inflation considered at 10% on today’s cost of Rs 25 Lakhs Source: EduFund Research
How can you achieve it?
So, for your child’s education, you need to accumulate Rs 1 cr after 18 years. To achieve this goal, you should consider doing a Step-up SIP with a yearly step-up of 5% (in-line with your yearly salary increment).
Compounding benefits will help you accumulate corpus even with a smaller monthly contribution.
For a longer horizon, such as higher education cost, the ideal way to invest is to start with high-risk funds, utilize the maximum period to accumulate wealth, and eventually move to the capital protection and capital preservation phase as you reach the goal.
Stages to goal-based investing
Accumulation Phase: During this phase, the risk appetite is high; thus, you have high equity allocation, and that too in mid/small space, sectoral, or thematic.
Capital Protection Phase: In this phase, the capital/wealth shift from high risk to average by including debt. You also move from risky equity to stable and large equity names.
Capital Preservation Phase: At this stage, the wealth accumulated needs to be preserved so that you can pay for your goals. In this phase, debt occupies the whole portfolio
Phase Investment Period RiskCAGR Wealth Creation01- 10 YearsHigh 14 -16% 11 - 13 YearsAbove AverageCapital Protection 14 – 15 Years Average11-13% Capital Preservation17th Year Below Average 8-10% 18th Year Low Source: EduFund Research Team
Source: EduFund Research
With the above goal-based approach, a nominal SIP of Rs 11,729 with a 5% yearly Step-up could help you reach your goal.
The entire journey takes care of rebalancing, capital growth, protection, and preservation by moving from high-risk equity to hybrid to low-risk debt fund as the time comes closer to the event date.
Define your short-term and long-term goals, and start saving & investing as early as possible. The strategy for both types of goals will be different. But having goal-based investing will make your life easier.