Five steps to help you prepare for your child's education expenses
A child's first day of school is a memorable experience for parents. Before dropping their kid at school they make a check list of items needed in the school - Bag, water bottle, snack box, books etc. Considering the high inflation rates school fees have experienced in the recent years, it is important that one should also include an investment plan for child education in that check list. It is important that parents are financially ready for the child's education.
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Calculate the amount required: The first step is to set target dates and the amount required at these dates. It is also important that we consider the inflation rates while calculating the amount of funds required in the future. The financial plans should always be made around the future value of the child's education costs, and not the current value. The future value can be calculated using the following formula:
Amount needed = Current assessed value x (1 + inflation rate considered) raised to the power of (Tenure)
If you are planning to use some of your existing investments towards your child's education, make sure you calculate the future value of the investment. These simple steps can ensure that you know the exact amount and the monthly savings to be made.
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Plan ahead: Once you decide on the target amount required for child's education, it is important to decide on the monthly savings and investments to be made. Investments maintain an interesting relationship with the investment tenure. The monthly investments to be made towards achieving a goal are inversely related to the tenure. At the same time, provided your monthly contributions and interest rate are constant, the total amount accumulated is exponentially proportional to the time period. This, in financial terms, is named as power compounding. So if you plan ahead, power of compounding allows you to save in smaller amounts in order to make sure that you achieve the required corpus.
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Assess the investment options available: Goals like kid's education and child's marriage are the most important goals in one's life. It is essential that you assess your time horizon and risk appetite before making investment decisions made towards achieving these goals. It's a prescribed practice to invest in well diversified portfolio rather than investing in funds of single asset class.
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Make sure these costs are part of your Insurance cover: Always make sure you include the cost of child's education, while calculating your insurance requirements. This ensures that your child education costs are not affected by any unexpected eventualities in life.
- Manage and monitor: Make sure you always keep a track of your investment plan towards child's education and check that it is performing. Always make sure you know the exact amount you have accumulated and compare it with the amount you should have accumulated at that time. Monitoring your portfolio at regular intervals will also help in deciding the ideal time to rebalance your portfolio.
Nitin Vyakaranam is the founder and chief executive officer, ArthaYantra, an integrated online personal finance company.
Disclaimer: The opinions expressed in this article are the personal opinions of the author. NDTV Profit is not responsible for the accuracy, completeness, suitability, or validity of any information on this article.