5 steps to build your children’s education fund
Updated: Jun 8, 2020
Did you see the cut-off list for Delhi University admissions? With almost everyone scoring marks in their high 90’s, probability of a child’s admission to a decent college is getting tougher by the year. My daughter is 8 years old now and I have unsettling nights thinking about where this cut-off list will be 10 years down the line.
If I want Sonakshi to get the kind of education that will ensure she has a fighting chance in the cut-throat world of business, medicine, engineering, or anything that she may want to do, I have to explore the possibility of private universities or even a foreign college.
Though, that does not come cheap. I was reading an article that stated that many Americans are under so much debt from their student loans that they may actually still be paying them off by the time their kids get to college!
While I may not have solved this problem for myself entirely yet, there are some things that I am practising and would suggest you do too:
1. Set your goal
Well, if you want to avoid a situation like that, you need to act now. Like I have. For Sonakshi’s college fund, here are some things that I have done. Going by the college fee today, I have accounted for inflation and I figure out that 10 years down the line, I will need at least ₹1 crore to cover her undergraduate education.
This means I have to save at least ₹43,000 per month in SIPs. Given my monthly expenses and the need to save for my own retirement as well, setting aside ₹43,000 per month is not easy for me. I have tried to balance investing for both these goals and will hopefully get to that “ideal” amount to save for each.
2. Take the Triple E Advantage
I had invested in the Sukanya Samriddhi Yojna. While the rate of interest is a little over 8%( and fluctuates every quarter), the benefits of this scheme are EEE (exempt, exempt, exempt).
This means that it is tax-exempt three times :
The principal – I get a tax exemption under Section 80 C of the income tax act;
The interest earned is also exempt from taxes;
And the maturity amount also comes to my bank tax-free.
According to the scheme, a parent or legal guardian needs to put money as little as ₹250 and as much as ₹1.5 lakh per year into it. These payments need to be made for 15 years. After this, irrespective of whether you make the payments or not, the money keeps compounding. When Sonakshi will turn 18, she can withdraw up to 50% of the money in the account for her higher education. The entire maturity amount will be available when she turns 21. The maths on the scheme, taking a conservative 8% rate of interest, shows that ₹1 lakh invested for 15 years will become ₹ 28.32 lakh.
So, by the time your account matures, when your daughter reaches 21 years of age, you would have more than doubled your investment. And all the money is free from any taxes. Since I joined the scheme when she was born, I am looking forward to a tidy sum when it is time for her to go to college. I am putting in between ₹8,000 and ₹10,000 every month for this scheme.
3. SIPs and Real Estate
The other major investment I have done for Sonakshi’s college fund is real estate. I have invested in a flat which earns me rent. Ten months rent goes into SIPs while I keep two months rent for maintenance and taxes. I am keeping the interest money I earn in the SIPs for my own retirement fund while building the corpus for my daughter’s education.
So at the present rent of ₹15,000 per month, in 10 years, I will have ₹15 lakh (just the money invested, not the interest). Hopefully, the rent will increase to keep pace with inflation and this amount may become more. Putting this together with the Sukanya Samridhhi maturity amount of about ₹30 lakh, we can now say that we have built a corpus of almost ₹50 lakh. This is half the amount I need to reach my goal of ₹1 crore. To make up the rest of the money I will need, I will put the flat on the market.
Today, the market price of the flat is about ₹ 75 lakh. Hopefully, 10 years ahead, this amount will be more and I will still have a tidy amount left over to add to my retirement corpus after taking care of Sonakshi’s educational expenses.
The most important thing to realise when it comes to your child’s education fund is to start early. If you are planning for your child, you need to invest, keeping in mind the taxes you will have to pay when you book your profits. Starting early is the key to being able to give wings to your child’s dreams.
If you start when your child is born, by the time he or she reaches 18, you would have had enough time to build a sizeable corpus. Investing as little as ₹18,000 per month for 18 years in SIPs, keeping an average 12% return in mind, you will easily reach your goal of ₹1 crore.
5. Don’t forget about yourself
Also remember, your child may be a priority, but you also need to take care of yourself. Account for your retirement fund. Have an emergency fund equal to your expenses for 3 months.
Have good health and life insurance policies. And also keep a fun fund going because as we all know, all investment and no splurging can make Jill a dull girl!
These are best practices I have been practising reviewed by Basis. If you haven’t started already, download the Basis app and begin this simple journey to achieve this financial objective.