To tell you the truth, when I got married, it never crossed my mind that I should be saving for the education of a child that would probably arrive one day. When the babies did arrive, we were too busy taking care of them or catching up on sleep. It was only when they started going to school did we think – “Oh, one day these kids will go to college (hopefully), we need to plan and save for that cost”.
But for a long time, this thought never translated into action. The kids seem capable of becoming anything from the next Michael Phelps to Michelangelo to Ramanujam. The possibilities are endless. Even sending kids abroad for education is more achievable these days. So what do we plan for financially? We were stumped by so many options.
Finally we realized we couldn’t really predict what kind of education the children would eventually select. So, we decided to benchmark our future costs on a course that is not cheap and looks set to remain popular in 10 years time. This way, we wouldn’t be too off the mark in terms of cost. Yes, you guessed it - B.E. (Bachelor of Engineering). The only courses which are more expensive than this are medicine or flying.
The next question that popped up was how much to save? Put in a different way, what would a B.E. course cost when my child completes 12th std? I had to rely on past data of fee increases to predict the future cost.
How did I do that? My starting point was the fees for a BE course today (easily available thanks to collegedunia / shiksha). I found that a fee of 3 lakhs per year would cover most colleges. I then spoke to friends and acquaintances who had completed B.E. over a range of past years to get the fee cost then. From there, it was easy to calculate the likely rate of escalation. For example, B.E. at IIT Madras cost Rs 25,000 a year in 2008. The current fees are 2 lakhs a year. So the annual cost increase rate is 23% (you can use this calculator https://cagrcalculator.net/result/).
IIT had the highest escalation rate from the data I got. The range of escalation varied from 4.2% to 23.1% (depending where the friend studied - govt college, aided or private).
As an example, my child is now 7 so I have time till my child turns 17. Assuming a 20% escalation every year (on the higher side), the fees would have moved from 3 lakhs per annum to 18 lakhs per annum. So, 4 years of BE fees means a total of 72 lakhs. Well, that’s a birth control ad for you right there ;)
No need to panic, let’s just focus on the numbers. We’ve arrived at a cost of Rs 72 lakhs, now it becomes easy to calculate the amount to be saved every month. I opened an SIP calculator (https://cleartax.in/s/mutual-fund-calculator) and calculated that a monthly investment of Rs 20,000 invested with an expected rate of return of 8% in 14 years (even when the child is studying we will be still be working and saving) would yield me Rs 61 lakhs. Phew that’s a relief.
You are thinking – “I need only 8%!! Then I’m going with PPF or Sukanya Samridhi which will give me a guaranteed return and tax-free too”. Wait, I’ve not included incidental costs like hostel fees, exam fees, pocket money, project work, why even preparatory courses. Let me assume that if I double the amount of fees, it should cover all these expenses. So now I need to save Rs 40,000 per month.
So now I'm putting a sizeable amount of money aside for a long investment period. Why shouldn’t I get more bang for my buck? This is where it makes sense to invest in equity mutual funds. The returns here are likely to be higher and the downside risk becomes much less. In my earlier calculation I was reaping 61 lakhs with an 8% return, so if I could get a 10% return with EMF, the corpus would grow to Rs 72 lakhs and a 12% return would translate to Rs 86 lakhs.
A few things to remember
- It is important to have term life insurance covering this amount (as well as living expenses and liabilities) so that your plans continue even in your absence.
- You also probably need to plan for a Masters course. You can use the same methodology, just take care to increase the tenure by 3 or 4 years
- The amounts may seem huge but don't panic. If there is a shortfall, education loans are a viable albeit cumbersome alternative
- Your income will increase over time so ensure you increase the amount of savings, this will increase the corpus
There are many variables that will increase or decrease education costs. Your child may get a merit seat in a government college or study in a college close by, thus reducing hostel and other costs. You may have two children and so the costs double. The important thing is to start now. Once you get the investments going, you can relax knowing your money is working as hard as you are, to give your child a good education and the springboard to a good life.
If you found this article useful and wish to chart a plan for your child, drop me a line at mathewpravin@yahoo.com and we can set up a convenient time to discuss. All the best to us and the next generation.
