It’s been established that better educated have a better financial future, greater job satisfaction, enjoy better life styles, and tend to be better parents. “Education pays” is an interesting report you may want to read. Cost of education has been escalating at a steady clip worldwide and in India these have been much higher pace as the government subsidies are being rolled-back. Good part about planning for education is that the expense is known once the children arrive. Key challenges in planning for a child’s education:
- What is the amount required for the child’s education?
- The amount required is very difficult to guess as we do not know what the child would like to do when she grows up.
- Even if we know the field of interest, we only have information about the current costs and we need to predict what the costs years from now.
- How to plan for this expense?
- How much to save
- Where to invest these savings
- How do we know we are on track?
Some steps we suggest:
- Identify the fields that you could be giving exposure to your kid (assumption here is that kid may be picking up one of these fields, don’t worry you will be reviewing this every year)
- Identify current median cost of education in each of the fields
- If you are looking at costs of 5 schools in the increasing order of costs, PL figure out what the college in the middle is charging
- Identify the range of medians from various fields
- Similarly one can do this for law school, engineering school, art school, music school etc and find the lowest and highest to identify the range.
- Lets take three fourths of this range as the current cost of education
- Assuming the median expense for medicine is 70K, law school is 65K, engineering is 60K, and music should is 50K.
- The range is between 70K to 50K, and 65K is three fourths
- Cost target – Cost of education is increasing yearly and 8% yearly inflation is a reasonable starting point
- Savings target to be invested in an equity index fund– Since these are long term plans, we suggest investing in an equity index. Return of equity index in India can be taken as 12% (actually it has been 14%)
- Equities are best instruments for a long horizon and tend to beat cost of inflation, Equity Index makes it easy for you by keeping you invested in the underlying companies at a reasonable cost.
- Save regularly – pl plan to save regularly rather, we recommend monthly
- If you feel the initial target amount will stretch your current budget, pl plan to increase the amounts as an when you are able to so that you can compensate for the initial shortfall
- If you can pl save more than the target upfront, this gives you an option to slowdown later-on.
- Pl review the education goals and the investments every year, you will have more information based on the evolving interests of your child as well as the changes in the costs of education.
- We believe, yearly review is one of the most important steps as this gives an opportunity for course correction as more and more information becomes available
- Pl note: This approach works for investment works best if the planning horizon is more than 5 years. We plan to publish an approach for horizons shorter than 5 years soon, pl stay tuned.
We recognize that this could be bit overwhelming – we have simple spreadsheet you can download and use. We hope this helps you plan to pay for education.