One of the important goal that all parents have is, to give good education to the kids.
Some start saving for college immediately after they have the baby.
But most will start thinking about it only when the kid is in High School.
If we look at college expenses, it is rising many folds every generation.
So saving for college is an important step in our financial planning.
How can we calculate the college expenses for our kids?
How can we save and invest for it? This episode is to explain that in detail.
Hello. My name is Vijay Mohan. You are watching Investment Insights.
An important note before we start this episode.
What I am sharing in this channel is from my learning from different sources and my personal experience.
I am sharing what I know as my opinions.
The important thing to note here is “My Opinions”. It might not be a fact.
Because no one is correct all the time. It is totally possible for me to say something wrong.
So it is your responsibility to double check what I sharing here.
I myself seeing that my opinions are changing as time goes.
When we learn new things, that could lead to change in our opinions. That is progress.
So you do not have agree on everything I am sharing here.
Like a swan in Indian mythology, take only things that you care about and ignore the rest.
I personally do the same as well. I learn from experienced people only the things that I care about.
If I do not agree on some of their opinions, I just ignore them. I am expecting the same from you as well.
But when you are learning something new, always be open minded that it could be true.
Do not listen just to confirm what you already believe in. That is called as Confirmation bias in Psychology.
Only if we have open mind, we will be able to learn new things and get ahead in our life.
“OK OK… enough of that… get into the content” right? Let’s do that.
When it comes to savings, savings for retirement should be the top priority.
Only after that, saving for kids education should come.
Because, we always have the option of getting a loan for kids education. But for retirement?
No one gives loan. We have to take care of ourselves.
So it is important to treat savings retirement as top priority. That is logical.
But are we logical beings? We are emotional kinds who see kids education is more important than retirement savings.
Nothing wrong with that. But we should know that it is not a logical decision, but an emotional one. That is all.
When it comes to college savings, the first question we get is, how much do we need for their college?
How can we calculate that? For that, we need to know the inflation rate of college fees.
When the normal inflation is 4-8%, college fees inflations is at 10-12%.
When I was in Anna University 21 years back, I paid Rs.3000 as my semester fees. Now it is Rs.28,000.
This college fees does not rise every year. But when it rises, it goes up by more than double.
So to calculate our needs, lets check out this calculator.
Let us assume that we need Rs.10 Lakhs to finish college Today.
If the college fees inflation is 10%, then we can see how that Rs.10 Lakhs need is changing every year down below.
In 5 years, we need Rs.16 Lakhs to get the same degree.
In 10 years, 26 Lakhs and in 18 years - 56 Lakhs.
So a kid who is born Today would need Rs.56 Lakhs to get the same college degree after 18 years.
Is your head spinning? It will. The sooner we understand this need, it is better for our planning.
This Rs.10 Lakhs is an example. Some get really tensed over this example number.
Some say “In which place it is 10 Lakhs? In our place we can get good education in 2 Lakhs”.
While some others say, “We cannot do anything with Rs.10 Lakhs. We need at least 20 Lakhs”.
So I am telling this again. This is an example number.
Use today’s expenses from the college you are targeting in this calculator.
To do Engineering in Govt. College we would need Rs.5 Lakhs to Rs.8 Lakhs.
Same in a private college would cost more than Rs.10 lakhs.
That too for a management seat, it could cost close to 20 Lakhs.
Whatever college you are targeting, get Today’s expenses in that college by reaching out to parents who have put their kids in that college recently.
Use that number in this calculator.
Now we know how much money we need. How can we achieve this number? Where should we invest?
We will see that calculator in the next tab.
For our example, let us assume that Today’s cost of that college fees is Rs.10 Lakhs.
Expected inflation rate - 10%. You can even use 12% here.
Current Age - child’s current age - lets say that it is 3.
Next, the age when the child goes to college - Lets say 18.
Where are we going to invest the savings for college? What is its return rate?
That is what we need to enter in “Expected Return Rate”.
For now, let us assume that we are saving in Fixed Deposit - 5.5%.
Current savings for education - so far how much have we saved for college?
We should enter that amount here. Let us put in Rs.10,000 here.
The two values we see at the bottom are the results.
For a 3 year old, to go to college at the age of 18, if the current expenses are Rs.10 Lakhs, then we need Rs.42 Lakhs after 13 years.
If we have to save for that in a fixed deposit, we should save Rs.15,000 every month.
This is a very simple example calculation. Now let us check how we can save and invest based on everyone’s risk profile.
First category - Conservative.
If you are thinking “This is savings for kids education. I cannot take any risk with this at all” - then you are this category.
You have 2 options. First option is PPF.
Every year, you can contribute up to Rs.1.5 Lakhs. It has got tax benefit as well.
But the problem with PPF is, we have to wait 15 years for the account to mature to withdraw the money.
If we open the PPF account before the child is 3 yrs old, then we can definitely use it for kids education savings.
But if the child's age is more than 3 yrs old, then we cannot use PPF for college savings.
Because our need for that money would come before PPD matures.
So early planners can definitely consider PPF. Today PPF is paying 7.1% as interest.
In future, this will only go down. So let us assume a safe 6% return rate in our calculator.
For this, the monthly savings is coming to Rs.14,300.
Second option in this category is, the one we already saw in our example - Fixed Deposit.
Though they are paying 5.5% interest Today, this will go down in the future as well.
Let us use 5% in our calculator. For Fixed Deposit, we are seeing Rs.15,500 as our monthly savings need.
Next category is Moderate.
If you are thinking, “If the college fees is rising at a rate of 10% every year, then I do need to take some risk with my investments to keep up with that rise” then this category is for you.
The best option for this category is to invest in hybrid funds that has both Debt and Equity.
Depending on your risk level, you can choose a hybrid fund that has equity % from 25% to 60%.
For example, “Canara Robeco Conservative Hybrid Fund” has 23% equity. You can choose something similar.
Depending on the equity allocation %, the returns would change.
For a 25% equity exposure, we can expect a return of 8%.
If we update the expected return in our calculator to be 8%, our monthly savings needs go to Rs.12,000.
For this strategy, it is better not to have equity exposure during the last 2 years.
If you ask me, when the child becomes 16 yr old, move the money from this hybrid fund on to a short term debt fund or to a savings account.
It is better to avoid market risk in the last 2 years.
Next category is Aggressive.
If you totally understand the risk in equity market and also have more than 70% of your retirement savings in equity, then this category is for you.
Though I call it as aggressive here, this is not really aggressive. Just a normal investment option.
When compared to other categories, this is aggressive stance and so I am calling it as aggressive.
You can invest 100% in equity Index fund till the kid is 13 yrs old.
It is better to gradually decrease the equity exposure in the last 5 yrs. Who knows how the market is going to be in those 5 yrs.
When the child becomes 13, you can move the funds to a hybrid fund that has 25% equity exposure.
For last 2 years, like we saw earlier, the money can be in short term debt funds or in savings account.
We can expect a return of 9-10% for this category.
When we enter this in our calculator, we see our monthly savings need as Rs.11,000.
The link for this calculator is in the description below. Copy it to your account and use it.
If you are using mobile, click the three dots in the top right corner, then choose “Share & Export”, then “Make a Copy”. That is all.
If you are a desktop user, just simply click File - Make a Copy.
Now you can see this file in your google sheets.
You can open it and change the numbers that fits your needs.
So all these are different options. These do not need to be followed exactly.
You can combine these different options to create your own strategy.
One another thing before we wrap up this episode.
I am seeing lot of kids. They are all very relaxed saying that their parents will get a management seat in the college.
When they have a thinking like that, do you think that they would put their best effort to get a merit seat? Definitely not.
So it is better to bring them up saying that they have to get their own loan for their college fees.
They should know that it is not our responsibility to pay for their college.
Then only, when we pay for their college fees, they will understand the value of it and will appreciate it.
They should know the sacrifices parents are making for their education.
Only when we are getting ready to send our kids to college, we are realizing all the sacrifices our parents have made for us - paying our college fees without even saving for their retirement.
We do not want to put our kids in the same situation.
“New Saying - 10,036”.
In the next episode, we will take a closer look at college expenses in US and how to save for it in detail. Thank You!