Ask a typical Indian parent what her best investment is, and most probably the immediate response will be an energetic, ecstatic “my child’s education". A few years ago, meeting the needs of the child gained even greater priority than providing for one’s own retirement, but thankfully, this trend is correcting. Like all investments, this category comes with its own risks or mistakes that the parent makes. When emotional factors hold sway over an investment decision, they are fraught with risks as these examples will show.
Buying a product with the words ‘child welfare’ on it: The worst mistake that you can make is to buy a life insurance policy on the life of a child, ignoring the principle that the earning member’s life is to be covered. Such a policy will not pay the college tuition if the parent dies. Marketing allows “children" products to be sold easier than others. It is important to understand how the product works and what the underlying risks and possible returns are. A good adviser will be able to “construct" a product that is customised and appropriate.
Leaving it too late to start saving: Many parents would start worrying about the child’s higher education costs only when the child had decided the career she would like to pursue and the country to study in. Agreed that when your child hasn’t even started school, it is difficult to determine the line of study, but your job as a parent is to save money and invest it to build a corpus to be utilised at a future date. It is heartening to find parents today who have saved for their child’s undergraduate studies only to realise that the child requires this kitty for pursuit of postgraduate studies overseas. The time to start investing for your child’s future is always today.
Not protecting the risks: When it comes to our child’s goals, we tend to believe we are immortal. After all, future earnings will more than take care of the expenses required. Life insurance is a must for the earning member; but there are risks even beyond. What happens if you suffer a critical illness and cannot earn your regular salary for six months while your child is studying? A simple way would be to start investing early (at least 7-10 years before the expenditure comes up) so that you have buffers created. Not hedging the currency in which the money is required for education may cause greater damage than inflation. And you may also need an adviser who has her ears perked up to protect risks, especially with the limited range of international products available for investment.
Underestimating peripheral costs: When my daughter went to the UK for her undergraduate studies, I remember my school classmate telling me that he was back home from engineering college in Vadodara (to Mumbai) fewer times than he saw my daughter home. The bleak weather, the shutdown of the campus during vacations, and home sickness will bring the child home more often than bargained, at least in the initial years. The indulgent parent may decide to reduce this gap by spending time and money closer to the child even during the term. Moreover, the child’s travel is always during peak season, and falling oil prices seem to have no impact.
Not teaching the child to manage their money: When the child moves out of the house, she has to manage her expenses on her own. Budgeting may be alien to those who can, between their pocket money payouts, draw on their parents as if they were an ATM machine. There will be periodic surpluses (between the time the parent transfers the funds and when the fees or rent is to be paid), and unexpected emergencies, which may include a rock concert of the band that the child has always wanted to hear. And unless she has been trained in this life skill, i.e., managing money, just as she was trained in science or mathematics, college life may not be all that fun as she had imagined when in school. Many parents I know ask the child to take an education loan, which has to be paid from their own future earnings, to teach them the value of money. This may not be a bad idea, particularly if they have the loan amount available as cushion with them.
Financial planning to meet the goals of your child could extend beyond just education: providing for their wedding expenses or setting them up in business could come next. Each of these elements need to be carefully planned for, and rational rather than emotional thinking will carry the day. After all, Supermom or Spiderman, you do know that with great power comes great responsibility.
Lovaii Navlakhi, founder and chief executive officer, International Money Matters Pvt. Ltd.