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Retirement, Children’s Education, their Marriages and House. For most people, these are the biggest financial goals of their lives.
Now at the face of it, these goals seem unrelated to each other. But if you think about it, you will realize that not planning well for even one of these goals, has the potential to screw up your plans to achieve other ones.
To understand this, lets suppose that at the age of 50, you have Rs 50 lacs in your retirement corpus. Lets also suppose that you have not saved enough for your children’s education.
Now the day comes when your child needs to pay Rs 10 lac every year for his 2-year post-graduate course. You can very well take an education loan for that.
But it’s possible that you might consider dipping into your retirement corpus to help your child pay his fees. It’s possible that your spouse might push you not to go for such a big loan. Even you might think that since your retirement is almost a decade away, taking out Rs 10 lac from Rs 50 lac might not be a big thing. Since your income will only increase going forward, you can compensate for this withdrawal by saving more in remaining 10 years (to your retirement).
But unfortunately, it is a big thing. Dipping into your retirement corpus means that you will break the process of compounding.
To put it more simply, it means that you will not have as huge a retirement corpus as you might have, had you not taken money out from the corpus.
That is not all. Once you do it. You might consider doing it again when you need to pay for your child’s marriage. Isn’t it? It’s a possibility, which you cannot rule out. Marriage expenditures can go out of hand very quickly.
So unless, you make separate arrangements for each of your major financial goals, chances are high that it will have a negative impact on those for which you have made arrangements.
I once wrote that you can get loan for your child’s education and marriage, but not for your retirement and that you should never treat your children as your Retirement Fund. At the cost of sounding funny, the previous statement does send out an important message.
For most parents, child’s education is something that they will never compromise on. But despite recognizing the need to save for their children’s aspirations and education, most people do not take timely action towards it.
To an extent, same goes for children’s marriage.
Result is that these people either end up taking loans, sell land or worst, take money out of their retirement corpus.
Ideally, you should start investing for your children’s education and marriage (assuming you do want to contribute to both) as early as possible.
The more years you have before you need the money, the less you need to save/invest every month.
So lets say that if you have less than 10 years before you need the money, then you might have to save/invest Rs X.
But if you have more than 15-20 years before you need the money, you might have to just save 1/3rdor even 1/4th of Rs X.
It is simple maths and as you will realize, because your investments have more years to compound.
How to Plan for Child’s Future?
Once you do realize that you need to start making arrangements for all your financial goals simultaneously, it is equivalent of winning one-fourth the battle.
It is like you have realized that just like your kids, even you need to do your homework. 🙂 And that too, start as early as possible. Now to be honest, one cannot guarantee that the amount saved by parents will be sufficient to fund their children’s education and marriage.
Children might pick a career path, which requires multi-year high-cost education. But being prepared financially, to the maximum possible extent is what parents should target. It is better than not being prepared at all. So if you end up saving Rs 25 lacs for your child’s education, when the course costs say Rs 30-35 lacs, then you are still better than someone who has saved nothing for child’s education. Isn’t it?
Next you need to ascertain how much money you need for your children’s education and marriage. For that, you need to do some simple maths and take into account current cost of education and how much you would want to spend on their marriages.
Please don’t forget to take inflation into account.
So a course that costs Rs 15 lacs today (when say your kid is 5 years old) might cost Rs 50 lacs after 18 years (when kid becomes an adult of 23). This is assuming an inflation of 7%.
Now I can share from my personal experience that as far as education is concerned, college fees generally don’t increase every year. But every few years, the fee increases without warning. It might even double! So its better to use a higher inflation figure while doing the calculations. Atleast keep it more than 7% that I used in example above.
Once you know how much you need for education and marriage after many years, you need to calculate how much you need to invest every month to reach the target.
Keep in mind that money being saved for education will not be used in one shot. Fee is paid semester/year wise and might be required over a period of few years. As for the marriage, money required is generally used up within a year.
While calculating the amount to be invested each month, you need to make an assumption about the expected returns your investments will generate. If you are starting early, you don’t need to take a lot of risk and can consider investing a small part in debt options like PPF (assuming goal is atleast 15 years away).
But if goal is not that far off in future, then PPF might not serve the purpose. But you can still consider keeping a part in debt funds and if the goal is atleast 5-7 years away, then make sure that most of your investments find way into well-diversified equity mutual funds.
A reader once mailed his query where he clearly mentioned that though he did plan to save for his child’s education, he did not want to save for child’s marriage. Now every individual needs to take his own call on whether to support their child education, marriage, both or none. But idea of this discussion here is to highlight that it is wrong to dip into the funds saved for your Retirement, just because you were lazy to not save enough for other children-specific goals.
This brings me to the last point.
Lets assume you are a great parent saving for your child’s education and marriage. You have been honest about it and have never missed a monthly investment towards these two goals. This is in addition to your contributions towards other strategically (systematically) important goals like retirement.
Suddenly and unfortunately, you die.
You fail to take care of your family’s financial needs inspite of working and saving hard when you were alive.
This risk needs to be covered too…
So make sure that you buy adequate insurance to cover planned expenses of your children (like education and marriage). Ofcourse this is in addition to coverage you need to have to cover for everyday expenditures of your family and to replace your income.
I know, all this sounds overwhelming if you are parent of young kid(s). It’s hard to understand the urgency of all this now, considering that your child’s major fund requirements are decades away. However, the sooner you begin, better off you will be when money is actually required. And just think of the respect your child will have for you when you tell him that you have made taken care of fund requirements for his higher studies. He will be proud of you and your foresight. That will be a pleasant scene to be a part off as a parent. Isn’t it? 🙂
If you are still not convinced, try talking to those whose kids are about to start college or about to get married in next 1-2 years. They will tell you how important it is to start saving early for all these goals.