In Part 1, we covered WHAT should be the expenses that you need to plan for. To summarize, College, Post-Graduation and Marriage expenses should be planned for. Other expenses can be managed from regular income.
Further, in Part 2, you read WHERE to invest your money and WHY that is indeed the best way – Equity, PPF, FD or similar instruments (in that order) could be a preference, provided you have time on your hands. You also understood the significance of having a Term Insurance plan to protect your child’s future from any unforeseen eventualities.
In this concluding part, let us see how the investments should be made and how much.
Part 3. Where to Invest when creating a Child Plan, and how much?
In the next few minutes, you should be clear about how a complete child plan can be made for your own child/children. And to do that, follow these steps.
First, start with the age of your child. We will use an illustration to simplify this. Say, you have a daughter who is 7 years old (if you have a younger child, even better since you get much more time). It is good that you are starting early, so you have 27-7=20 years for her marriage, 22-7=15 years for her post-graduation, and 18-7=11 years for her college expenses to kick off. That’s a great situation to be in.
Next, let us plan an amount. While there are several ways to do it, we will use a thumb rule here which is specific to India. i.e. Cost of the same for the parent, multiplied by 15. Your college expenses were probably about Rs. 1 lakh, Post-Graduation expenses were about Rs. 3 lakhs, and Marriage expenses were about Rs. 5 lakhs. So it will cost your daughter Rs. 15 lakhs, Rs. 45 lakhs and Rs. 75 lakhs respectively. (Don’t add them up, you need them at different times). Now these costs are for the kind of degree and education that you got. If your daughter makes it to an international university of repute, the cost of education (but not marriage) could (at least) double.
So we now have a revised plan.
- Rs. 30 lakhs for College after 11 years,
- Rs. 90 lakhs for Post-Graduation after 15 years,
- and Rs. 75 lakhs for Marriage after 20 years.
It is getting clearer now. But the amounts are staggeringly high, aren’t they? Don’t worry, there is a solution. And the power of compounding helps us achieve these goals.
Next, understand where to invest the money and what kind of return can be expected.
Going by the above infographic…
- College Fund (11 years) – 75% in Equity, 25% in a Fixed Deposit – expected tax-free returns will be 10%
- Post-Graduation Fund (15 years) – 90% in Equity, 10% in PPF – expected tax-free returns will be 11%
- Marriage Fund (20 years) – 90% in Equity, 10% in PPF – expected tax-free returns will be 11%
- A term plan will be required to cover up for these 3 expenses just in case you were to die midway into the plan.
We now need to work backwards to find out how much money is required to be invested if done regularly every year.
- College Fund – Rs. 1,05,241 per year to be invested every year for 20 years
- Post-Graduation Fund – Rs. 2,35,664 per year to be invested every year for 15 years
- Marriage Fund – Rs. 1,47,172 per year to be invested every year for 11 years
- A term plan will be required for a total life insurance cover of Rs. 1.90 crores for 20 years, that will cost you roughly Rs. 20,000 per annum.
It’s clear now. You have to invest about Rs. 5 lakhs per annum to ensure that all plans for my child are met. If you have another child, this amount could be higher depending on how old he/she is.
You can now proceed to do this calculation for your own child/children. If you find the amount that you need to invest too high, you can even opt to start with a lower contribution now and increase it every year by say 10% (in accordance with increase in your annual income).
You may even choose to buy a child plan from an insurance company which gives you a combination of life insurance and tax-free returns and is safe and guaranteed. Go ahead but ensure that the gap in insurance is made up by a term insurance plan, and the gap in returns is made up using equity instruments such as ULIPs/Mutual Funds, or through PPF/FD/RD. Remember the objective yet again – to beat inflation.
A few closing remarks.
Discipline is the key. If you want to achieve the goal, ensure you invest regularly. Once a month (from your salary) through an ECS (electronic clearing system from your bank account) is the most recommended mode since it deducts the money automatically for this important cause. An insurance plan works well here since it needs regular investment of premium to keep the policy in force, and forces you to stay invested.
Liquidity in your investments is NOT desirable. This is so that you don’t withdraw from the fund for something else. You don’t want to compromise on your goals, right? An insurance plan works best here as well since it has high surrender penalties.
We pray this works for your child/children.