Amid the uncertainties of life lie some certainties. For instance, children growing up, school education expenses, rising cost of higher education, career goals of children, etc. Above all, it is certain that the money required for education today would leapfrog at least tenfold by the time children enrol in higher education. So, is it possible to meet the 10X rise in education expenditure in the future?
There is no one-size-fits-all solution for investment decisions. Yet, some are universally applicable, and financial experts consider them the golden rules. Let’s dive into details.
Career goals
First and foremost, understanding the career goals of children plays a major role in planning. For instance, if your son/daughter wishes to study abroad, you might have to earmark more money for meeting the educational expenses. If they do not want to go abroad, your actual educational expenditure might be comparatively less.
Moreover, the courses they are interested in also play a major role. Not all courses are costly. If they are really interested in courses that are less competitive and relatively cheaper, you are relieved to some extent. However, the decision must be purely based on their wish not on financial condition.
Next, understanding the educational capacity of your son/daughter is essential. If they are good at studies, you might expect some scholarships or fee waivers. If not, the expenditure would be more.
Financial investigation
You must understand your current financial position. A thorough, honest analysis of income, expenditure, debt, luxury and lifestyle habits, risk appetite, savings, investments, short-term and long-term goals, dependents (not just children but also aged parents) and the presence/absence of family-support system must be made.
Luxury and lifestyle habits play a spoilsport in savings and investments. The two are inversely related. The more you spend on luxury, the less you save or invest.
You should clearly zero in on a target; that is, to which level would you want to reach regarding the above variables. Often, quantification of the above variables to the approximate levels is beneficial. For instance, let’s say the current savings is ₹1,000 a month and your target savings is ₹10,000 per month.
Next, analyse the gaps from where you are to where you want to be (again, quantification helps). In this case, ₹9,000 a month is the gap between the current and the target level. You should also figure out the time available for reaching the target, say how many years you have in between.
Budgeting exercise
The moment you realise there are gaps and are aware of the time available, start budgeting. Cut down on lifestyle expenses and expenses on instant gratification. Know the difference between needs and desires and, as far as possible, spend on needs, not desires.
Start early
The key solution to attaining the target is to start early. Only then can you enjoy the magic power of compounding. Say, if you start when your child is just two or three years old, you are giving money ample time to grow, and when it multiplies, goal attainment is easier. In contrast, if you start when your son/daughter is in Class IX or X, you are losing the potential power of compounding, and on top of it, you must save more money per month for attaining your target.
Educate your child
Teach your child about the importance of cutting down on expenses, money, savings, investments, education, financial discipline and financial responsibility.
Insurance coverage
The first expenditure towards securing your future must be insurance policies. To avoid touching savings or investments in times of emergencies, you must be well protected by all kinds of insurance policies. Say, a term policy for at least ₹1 crore; a family-floater health insurance policy for at least ₹10-₹25 lakh; if you have your own house, buy a Bharat Griha Raksha policy with the sum insured covering property value.
Risks/rewards
Do not put all eggs in one basket. Your investment portfolio must have a combination of fixed/recurring deposits (emergency fund), mutual funds, gold and stocks. If you have 8-10 years for your goal, invest a portion of your savings in equities. Though equities might be highly risky if held for less than five to seven years, they have the potential to give inflation-beating returns if invested for more than 10 years or so.
(The writer is an NISM & CRISIL-certified Wealth Manager and certified in NISM’s Research Analyst module)