Saving for Children’s education: When should you start?

If there is one thing no parent wants to compromise, it is their children’s education. The parents would do anything to provide the best education to their children. Of course, not everything is under their control. At the same time, they would want to be prepared financially.

How do you prepare financially for children’s education? Easy. By investing. When should you start? When does it become too late? Where should you invest? Which products should you avoid? Let’s find out.

When should you start saving for children’s education?

Frankly, the answer needs nothing more than common sense. The right time to start investing for your kid’s education is when he/she is born. You have good 17-18 years before you will need a big lump sum to fund higher education. You can plan investments for their post-grad education and weddings too. The good part is that these goals are even further away.

You may argue that even school education is getting more and more expensive every year. Therefore, you must plan investments to fund their school education too. Indeed, school education is getting very expensive. In bigger cities, annual school fees in excess of Rs 1 lac is not very uncommon. However, in my opinion, school education should be financed through your regular cashflows (and not through investment cashflows). In other words, you must send your children to a school that you can afford. In any case, funding school education through income (redemptions/interest/dividend) from investments is unlikely to work unless you have a lot of money.

By the way, the first thing that you must revisit when you are expecting a new member in the family is your insurance coverage. This is because you are about to add a baby to the family and a few goals to your financial plan. This can increase your life insurance requirement. Revisit life cover and take requisite action. Investments come next.

In fact, you may want to revisit your health insurance coverage too but that you can do only after the baby is born. You can include baby in the plan and enhance coverage at the time of renewal. Certain health plans (with maternity coverage) provide cover to new-borns too but these plans are very expensive. You must avoid such plans. If your employer provides health cover, those plans usually have in-built maternity and new-born baby cover. Use that.

In my opinion, investing aggressively for kid’s education before they are born is a bit of an overkill. Or a bit too early.

It is never too late. Early is better

The sooner you start, lesser the pressure this will put on your cashflows.

Many of us don’t start investing diligently for kid’s higher education until they are 5-6 years old. Not that, they are irresponsible. Just that they never got down to investing with purpose for children’s education. Perhaps, all they needed was a little nudge. A nudge could be as simple as your colleague telling or asking you: “I am investing Rs 10,000 per month for my daughter’s education” or “How are you investing for your daughter’s education?” or you reading this blog post.

Even though it is never too late, the sooner you start the better it is.

Let’s understand this with the help of an example. Let’s say you will need Rs 50 lacs for your daughter’s education. To keep things simple, let’s assume this is the future cost. The table below shows the amounts you will need to invest on a monthly basis for various combinations of time and return.

As we can see, everything else being the same, the sooner you start, the lesser you will have to invest per month. Higher the returns, the less you need to invest. Starting early eases the pressure on your cashflows. If you start early, you can afford to start small.

For instance, assuming a return of 10% p.a. on your investments, if you don’t do anything for the first 3 years, you will have to invest 50% more for the remaining 15 years (12,450 instead of 8,675). If you didn’t invest for the first 6 years, you will have to invest more than double the amount (18,497 instead of 8,675). As we can see, the task is not impossible but becomes increasingly difficult if you delay planning for too long.

We can argue about the rate of return that you will earn over the next 15-20 years. However, that is beside the point. When in doubt, be conservative with your return assumptions. Invest more and create a buffer. We don’t control beyond a point how much return we will get but we can control how much we invest.

Read: Financial Planning and Investing more

Where should you invest for children’s education?

You can use a mix of PPF and a low-cost equity mutual fund. Or you can simply pick up a low-cost hybrid equity fund.

If you are fortunate to have a daughter, you can consider Sukanya Samriddhi Account too. However, Sukanya Account has several restrictions on withdrawals (even though I understand that those restrictions are for the right reasons). As you move closer to the goal, you can shift money gradually from equity funds to fixed deposits or good debt mutual funds.

Note that PPF and SSY have lock-in periods. Keep this aspect in mind if you are starting late.

That is all you need to plan for your kid’s education. You don’t have to look any further.

Don’t fall for complex and high-cost insurance plans. Such plans come with emotionally appealing nomenclature. Don’t feel guilty when you say No to such plans. For God’s sake, don’t purchase insurance on the life of the child. This is one of the most insipid things you will ever do. Based on limited interactions with clients/investors, my experience is that investors who start late (or investors who have just had a baby) are likely to find merit in such fancy and complicated investments.

Read: How (not) to invest for Children’s education?

When it comes to investing, simple beats complex most of the time. Avoid noise. Keep it simple. You should do well.

If you don’t want to do this on your own, seek professional assistance from an investment adviser. The cost of professional advice will be far less than the cost of poor financial products.

Read: Do’s and Don’ts while planning for children’s education