How to Plan for the Future Expenses of your Child – 1

This is a 3-part series on planning the future expenses of your child. It will take you about 15 minutes to read this. We hope you can first invest that time for your child, before you start investing money.
 
We spoke to a lot of people trying to understand how they approached this challenge. Yes, a challenge it is indeed. And we realized that we had a lot of variety in responses – almost as many as the people we spoke to. But there was one thing in common – no one says that they do NOT have a plan for their child. That’s a good start. 🙂 But the problem is – do they have a plan that will really work best? Will it stand the test of time? What if the parent dies halfway into it – will it still work? These are questions we will answer in these 3 articles. Do read with your fullest attention.
 
Many parents appear unclear about the kind of expenses that will need to plan for. Sometimes, they seem to not realize that the killer called inflation is constantly working to increase the requirements for their child’s education, marriage, etc. That’s not the right thing to do. Also, some parents just want one big sum of money, and do not take timing of the need into account. That’s not right either.
 
We will now attempt to answer the following questions for you.

• Part 1 – What are the expenses to be planned for our child’s future?
• Part 2 – What should be the approach when we do this? How can we make it shock-proof?
• Part 3 – What investment options can ensure that our aspirations for our child’s future are met?

Part 1 – What are the expenses to be planned?

Before we start anything, it is important to list the goals. Let’s start with clarity on this.
 
Let us assume your daughter is say, 3 years old today.  She is already in her Nursery class.  You have paid fees of say, Rs. 30,000 for the year.  And you have already started getting the feeling that much larger expenses for her schooling are going to hit you shortly.

• There are also questions like … Which school? a nearby one which is cheap or an ICSE school whose fees are a little higher?  or the IB school which your office colleague’s daughter also goes to, will that be the best one for your daughter as well?  But that one charges nearly Rs. 4 lakhs per year for all-round development.
• Of course, there is also extra-curricular activities – painting, abacus class, chess class, music and instrumental, karate, … the options are unlimited.  All that is going to cost you money as well.  Not enrolling for such classes is perhaps not an option in this competitive world. It’s a race, and it has already begun!
• As she grows, there will be school tours, college expenses, post-graduation school expenses, hostel and food expenses, etc.

 
We will leave these choices for you to decide what is best for your child.  You are the best judge. But remember that these expenses will keep going up over time for two reasons – one : higher classes will cost your more, and two : over time, inflation will make them even more expensive.
 
You stand no chance to afford all this if you haven’t planned for it. That could be a failure as a parent, and we are sure you don’t want that to happen. So not planning is not an option.
 
Here is a recommended approach that will ensure that your child’s requirements in the future are taken care of. While these costs may look daunting, if you start early there is one powerful thing you will have on your side – TIME. And for those who do not believe that time can be powerful, here’s some timely advice.
 
So what are the expenses that can be managed as they come, and which are the ones that you need to really plan for? Here goes.
 

1. Regular Expenses for you child – School fees, bus fees, coaching and tuition fees, extra-curricular activity fees, etc. till your child reaches Std. XII.
2. College Expenses – Depending on which stream of education (Medicine, Engineering, Art, Languages, Literature, Economics, etc.), which college (a local city college, an IIT or an IIM, a foreign University, Harvard, LSE, INSEAD, etc.) and where it is located (your city, somewhere else in India, S. E. Asia, Europe or Australia, the US, etc.), the amount of money that your child will need will vary immensely – anything from Rs. 5 lakhs a year to Rs. 2 crores a year, since inflation will make these costs as much as 8-12 times their current costs.  If you don’t believe me, compare the costs 15 years back to today’s.
3. University Expenses – Similar to College Expenses.  Will vary immensely depending on similar factors.
4. Marriage Costs – Whatever socioeconomic class you belong to, marriage expenses are generally large compared to your income.  Sometimes they eat into your savings/assets significantly.

College, University and Marriage expenses can be really large and should be planned.

Regular Expenses for the child should be managed through your regular annual family income.

Have a look at the infographic below to understand what we mean.
 

Failing to plan for your children’s expenses is planning for their failure.  But once you do it successfully and your child gets married and settled in his/her life, you will be happy that you did this planning and were able to fulfill your responsibility towards your child with such aplomb. Nothing is more rewarding than that feeling.

 
Great, you have done well having read this so far. This understood, we shall now move on to know what should be the approach when planning for these large future expenses.
 
Take me to Part 2 : How to approach planning large future expenses for my child.