Child Special: Saving for Children

Someone rightly said that the only thing children wear out faster than shoes are parents. Not just physically, mentally and emotionally, but also financially. Bringing up children is expensive. For many people, the money is limited, the demands far exceed the supply and then, parents have other financial commitments as well. Ask any parent on the change they felt after the arrival of the child. Yes, most of them would narrate the emotional experience they encountered, but there will be equal number of people who will tell you about the financial impact that lasts 18-20 years before your child find their own footing.

So, what can you do to ensure that your day-to-day expenses are taken care of, that your future financial plans are not ruined, and still give your child the best that money can buy? For a start, plan your finances keeping in mind how it will change with the birth of a child and splice the next two decades or more into 3-4 segments to plan for the financial implications. Most importantly, among Indian parents, the one big financial impact that they face over their children, is their cost of education. According to the annual The Value of Education 2017 report from HSBC; most parents in India help their children with expenses on education.

Realising their dreams

Ask a toddler what they want to become when they grow up, and chances are you will get responses which change by the seconds. From wanting to be a fulltime princess to wanting to be a singer cum fighter pilot, your child’s ambition is ever- evolving. For parents, having enough to meet the future financial needs of their children is of utmost importance. Undeniably, your child’s education may become one of the most important financial expenses you have to plan for. And as a parent, you would do whatever it takes to make your little one’s dream a reality.

Pursuing quality education at premium institutes in India or abroad is a costly affair. An engineering degree from a private college would cost around Rs 20 to Rs 25 lakh over the course of four years including all expenses. The cost of the same when pursuing a degree in medicine would be at least Rs 40 to Rs 50 lakh from a private medical college. An early start to savings will help you accumulate much more money for obvious reasons. Considering how important your child’s future is to you, you should start investing early and investing systematically to achieve this vital goal.

For instance, your child may be just two years old now, and you may consider investing for her future education needs after 5-6 years. Think again. For instance, if you think you will need Rs 1 crore for education when they turn 20. If you start today, you will need to invest Rs 16,651 per month (at 10% per annum). However, if you delay by 5 years, you will need to invest Rs 31,451 per month. Almost double the amount if you delay by only 5 years earning the same returns.

It does not end here as one of the biggest factors that impacts the future cost of education is inflation. And, unlike the publicly disclosed CPI or WPI, which indicate the benchmark inflation rates, inflation impacting education is much higher. It is for this reason that one is advised to start saving and investing at the earliest when it comes to creating an education corpus for your child, even when it seems a distant financial goal. It thus becomes crucial for you to plan towards your child’s future financial needs and work towards it.

Sticking to a plan

Follow a step-by-step systematic approach towards saving at the earliest to achieve this financial goal easily. However, there is no financial instrument which automatically helps you achieve this goal in a foolproof manner. But there are a few structured plans that address planning for a child’s future, especially from insurance companies and a few mutual fund schemes, and you might find it worth your while to explore these. To reach the right amount corpus for your goal, you have to use available financial calculators to save and invest on your own.

Investments in long-term diversified mutual funds and certain life insurance policies, which are targeted towards saving for this goal exist and are widely used by scores of parents. Both these instruments help you save small sums over the long run, which benefit from the power of compounding over time to build up a sizable corpus. The systematic investment plan from mutual funds, is a convenient tool to invest in mutual funds and efficient in the manner that they are structured.

For instance, over the course of building the corpus, if you wish to switch from one fund to another, there is provision to do so without losing out financially. Likewise, as and when you have lump sum to invest, you could park it in mutual funds, unlike insurance plans, which are fairly rigid when it comes to additional contributions beyond what the policy is structured around.

Yet, child plans from insurers are a favourite among most parents when it comes to savings for their children’s future. A reason for life insurance being popular over other forms of insurance is the fact that life insurance policies deploy the emotional quotient when promoting their products. It is also a fact that insurance policies provide the much sought after tax saving edge, which makes it popular a choice.

Life insurance also scores over a feature which is very unique to them – waiver of premium feature that they have. This feature kicks in the event of the death of a parent, in which case the insurer pays for all the future premiums, which means the family is not financially impacted to maintain the policy or create the corpus for the child’s financial needs towards education in the future.

Although saving for child’s education is a long way to go, make sure that you start diverting the corpus that is built into debt instruments as you approach the year in which you will need the money. As investments are in market linked instruments, any fluctuation to the stock market indices should not adversely impact your savings for this goal, which cannot be compromised. Unlike most other financial goals like vacation, buying a car or a house, which can be pushed away by a few years, your child’s education cannot be postponed. The year they finish school is fixed, and you cannot compromise on admission years because you do not have the necessary money for college.

Alternate options

You may stare at the fact that unless your child manages to get a full scholarship, you may have to shell out easily a few lakhs on college—and several lakhs if it’s a professional course. Scholarships are a boon, if you are academically oriented and gifted, as those who do earn them, find that their tuition fee is waived, which is a huge savings on the cost of education. Most education institutions do offer scholarships, which are merit-based and some have special examinations to award scholarships.

Moreover, the Ministry of Human Resource Development provides financial assistance to deserving students having family income of less than Rs 6 lakh per annum. In this way, the student need not depend on their parent’s to fund their college education, as these scholarships can be used to meet a part of their day-to-day expenses while pursuing higher studies. To make sure that such financial aid reaches the deserving candidates, the Central Sector Scheme of Scholarship for College and University Students is covered under the Direct Benefit Transfer (DBT) wherein the scholarship is disbursed directly into the bank account of the beneficiaries. For more information, do visit https:// scholarships.gov.in/ to know the details of the scheme.

Several institutions allow students to take up teaching assignments and part time work to part-fund their education. Many students are these days taking recourse with such options to self-fund their education dreams. Several portals are dedicated to help students find suitable jobs and assignments, which has multi-pronged benefits – they get to earn and they also get the much needed experience, which comes in handy in their later years of college, when they are looking for placement.

The emergence of start-ups and incubators in college and university campuses is fast catching up, which provides youngsters with the opportunity to not only create something big, but also participate in the growth of several companies that are being setup from campuses. Several colleges encourage students to take up research assignments wherever possible to not just earn some money, but also explore their interests so that they can accordingly specialise for further studies or take up jobs that meet their interests and talent.

And, when nothing works by way of having an education corpus or filling the gaps with part-time work or scholarships; there is education loan. With education as a thrust area, the government has made education loan, a priority sector lending for both public sector and private sector lenders and banks. The interest rate on this loan is standardised across lenders, which leaves very little to haggle for students. Further, in recent years, the government has facilitated the setting up of the Vidyalakshmi education loan portal, where one can apply for an education loan and get the loan approved by any of the empanelled lenders.

Education loans have several benefits such as tax savings and the fact that the loan has to be repaid by the student and not the parent. Loan repayment by students commences on completion of the course, once they start earning. Typically, the loan is available to students pursuing courses in India and abroad, with the loan ranging from Rs 10 to Rs 20 lakh depending on the course one opts for. You can avail tax benefits under Section 80E of Income Tax Act on the interest paid on the loan. This is a big advantage and financial relief for students who have borrowed to fund their education.

Moreover, the deduction applies only after repayment of the interest on the loan commences. And, the moratorium period or repayment holiday, which is either one-year after completion of the course or six months after getting a job, whichever is earlier gives plenty of time for student loan takers to plan the repayment. The easy availability of this loan also means that parents need not be overly worried when it comes to mustering up the corpus in case they are short of it. It also helps them focus on their other financial goals than disrupt them on count of their child’s education needs.

When it comes to raising children, money is limited, and demands far exceed the supply. The bottom line is clear that a child might well be a blessing, but is also definitely a long-term expense. But the good news is that there are several options available, albeit not as many as there ought to be.

(A marketing initiative by Open Avenues)

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