How to plan for your child’s schooling costs and other financial goals

An infant requires constant attention, nutritious food, and medical care during its first few years. As the child gets older, costs for clothes and education begin to rise, but those for health care generally begin to decline. As clothing becomes more useful with age, clothing costs gradually reduce. The costs start to soar as the youngster enters high school (or the secondary class, from class 8 onward), then transfers to college for professional courses and higher education.

So, how should you tackle these expenses?

Saving and investing is a great solution. A systematic, disciplined, and rationalized approach to investing is essential when discussing saving via investing.

All the significant expenses for your child must be budgeted first. Using a logical approach, one must prioritize the costs and divide them into short-term, medium-term, and long-term objectives. Short-term goals require significant capital protection and could occur anytime during the year. For instance, a corpus for medical emergencies for children.

Medium-term goals are usually more than three years away. For instance, while budgeting for an infant’s school expenses, a parent considers play-school costs as a medium-term goal. Long-term goals are those goals where you have time on your side. This will include undergrad college tuition, postgraduate fees, and school fees for grades VIII through XII (assuming you are planning when the child is a baby).

After classifying the expenditure by priority and time frame, one should create a specific plan for each category.

But how do you go about with this?

You can start with an emergency fund. As an example, you can keep aside ₹1 lakh as emergency fund. But the funds should be kept in assets that are highly liquid and safe. For such short-term objectives, debt funds are the best choice because they are substantially less volatile.

Let’s have a look at a medium-term and long term-goals using primary and secondary education as an example.

Parents will get around 5-6 years to meet the investment goal for primary education and 10-15 years for secondary and higher secondary education, if they start investing when the child is born. To plan for these expenses, one needs to find out how much they need to pay in the future. One rationale approach would be to find out how much it costs today and then forecast the amount based on education inflation. One may use the EduFund education cost calculator to find out these amounts. Monthly systematic investment plans (SIPs) in mutual funds would be the best option to accumulate the target amount. Using the target SIP calculator, one may determine how much SIP is required to get to that amount.

For medium-term goals, one cannot take the risk aggressively. For such goals, hybrid funds are suitable. Depending on the risk appetite, one may consider conservative or balanced advantage or aggressive funds investing in debt and equity. By investing in hybrid funds, it is possible to have capital protection and limited capital growth.

For long-term objectives where time is on your side, you can consider investing in equity funds such as small- cap, mid-cap or flexi-cap funds. These funds provide growth potential over the long term. Also, although these funds are considered risky, the volatility reduces over the longer term.

However, one needs to remember that it is not a one-time exercise, and the investments must be rebalanced over time. As you come closer to your goal, the risk appetite reduces, and hence, you need to shuffle your investments from high-risk equities to moderate-risk hybrid funds and further to low-risk debt funds, depending on the time left with you.

In conclusion, decide on both the short-term and long-term goals. Begin saving and investing as soon as possible. Both the set of goals will require a different approach. However, investing with goals in mind will make your life simpler.

Eela Dubey is co-founder of EduFund.