Financial planning: How to plan for your child’s future?

As a parent, all of us want the best for our children. Not just when they are young but also when they grow up and enter the real world. Most parents have goals to save up funds for their children’s education, marriage, etc.

But frankly, these are not the only goals that parents have. They also need to provide for other big goals like a house purchase, their own retirement savings, etc.

So how can you too start planning for your child’s major future expenses which come for graduation, post-graduation and finally, marriage?

Let’s understand how to go about it using a simple example.

Suppose you have a 3-year old daughter, for whom you have the following goals (with approx. costs in today’s value) -

• Graduation expenses - ₹20 lakh today
• Post-Graduation expenses - ₹30 lakh today
• Marriage expenses - ₹15 lakh today

But since she is just 3, you still have some reasonable time to save for these financial goals like -

• Graduation - after 14 years
• Post-Graduation - after 18 years
• Marriage - after 22 years

Now let’s not ignore inflation and just rely on present costs. Assuming inflation averaging about 7% (it may be higher in reality for education), the actual money required at the time of the goal will be much higher and as follows:

• Graduation - ₹52 lakh after 14 years
• Post-Graduation - ₹1.01 Cr after 18 years
• Marriage - ₹66 lakh after 22 years

The target for each goal is clear now.

So how can you reach these figures? That is, how much do you need to invest for all three goals starting today?

Here is your answer:

• Graduation - ₹12-13,000 monthly for 14 years
• Post-Graduation - ₹15-16,000 monthly for 18 years
• Marriage - ₹6-7000 monthly for 22 years

We have assumed here that the investments generate returns of about 11% on average from a portfolio that is equity-heavy. It has also been assumed that this is the constant investment requirement though in reality, as your income increases every year, so should your regular investments.

But what if you realise the need to start investing a bit late, when the child is older, say 10-year old and accordingly, you have less time at hand?

In that case, you would have to invest more. Also, since less time is at hand, asset allocation might have to be slightly lesser in equity than what was possible in the earlier scenario. Here is how your investment requirement changes –

Here is your answer:

• Graduation - ₹24-25,000 monthly for 7 years
• Post-Graduation - ₹24-25,000 monthly for 11 years
• Marriage - ₹9-10,000 monthly for 15 years

So the lesson here is that the earlier one starts, the lesser is the investment requirement for the goals. Early bird gets the worm.

Few more things to keep in mind when taking the above-discussed investment route for your children’s future.

A 10-15 years investment period is a long time. Many things can and will change. So, make sure that every 1-2 years, you do a review of your investment portfolio. And if need be, rebalance from equity to debt or vice versa, and exit instruments that are not performing as expected. You cannot start investing now and forget about it for 10 years.

It’s a lot like driving. You need to be awake and aware of where the road is going and drive accordingly.

Also, get yourself a plain term insurance of an amount that is sufficient for your child’s future requirements (including schooling expenses, higher education, etc.). That way, you will cover the risk of you not being there and children still having the money to complete their education.
 

Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.