Child educational plans are investment tools that are developed for parents to save & invest funds for their children’s future education. These plans offer a dual benefit of savings & protection, with guaranteed returns. The corpus accumulated can be used for a child’s education, marriage, or any other additional requirements, even in the absence of a parent.
This includes book costs, tuition fees, & other educational expenses. In this article, we will explore the steps to save money for a child’s education, thereby alleviating financial constraints for parents.
Steps to Build a Child Education Plan for Your Child
Below are the steps to build a Child Education Plan to make the journey easier:
Step 1: Define Clear Education Goals
Begin by visualising the educational journey of your child, considering the factors, such as the institutions available, the level of education, & any area of specialisation. Defining clear education-related objectives lets you act as a framework to make an informed decision.
Step 2: Estimate Future Education Costs
Review the present education-related costs in your location & consider inflation rates. If a 4-year program involves an education cost of INR 5 lakhs today, with an annual inflation rate of 6.5% in 15 years, it will cost INR 12.68 lakhs.
Step 3: Open a Dedicated Education Fund
The savings towards your child’s education fund should be done separately from other savings or investment plans. One can also consider some tax-saving schemes such as PPF, Sukanya Samridhi Yojana, etc., to avail special benefits.
Step 4: Start Early & Leverage Compound Growth
One should start investing early for a child’s education to avail of compounding benefits, resulting in maximising returns on the investments made.
Step 5: Diversify Investments
An investor should make an investment in a diversified fund to mitigate the risks & optimise the returns. A balanced portfolio includes debt funds, stocks, mutual funds, etc. & may be a child education plan. One can also consult a financial advisor to customise the investments according to their financial objectives & risk tolerance level.
Step 6: Regularly Review & Adjust Your Plan
With your child’s growth, your financial responsibilities & circumstances also change. Hence, it is advised to review the plan periodically to best align with the situation. An investor should make necessary adjustments in their plan by remaining informed about the education-related costs & financial markets.
Step 7: Leverage Tax Benefits & Government Schemes
Many government schemes offer tax benefits, which encourage parents to invest in child education plans. Hence, it is advised that parents avail these opportunities.
Things to be considered before investing in a child’s education plan
The following are the things that should be kept in mind while investing in a child’s education plan:
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Financial Objectives
Understand the financial objectives before finalising the plan, considering certain factors, such as location, type of course to be opted for, expected expenses, etc.
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Investment Horizon
An investor should also consider the age of the child, i.e. longer tenure & growth-oriented investments should be opted for if your child is young.
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Rising Education Costs
Consider the inflation factor while choosing a plan to estimate the rising educational costs in future. This ensures that the maturity amount is enough for your child in the near future.
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Affordability of Premium
An investor should select a plan that best suits their budget. As these plans require long-term commitments, an investor should not discontinue the plan in between, resulting in losses.
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Risk Tolerance Level
An investor should understand the risk acceptance level to choose the best-suited plan. This means that traditional plans offer stable returns, while market-linked plans, on the other hand, offer high growth with high risks.
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Evaluating the Plan features
Check for the plan features, such as maturity benefits, partial withdrawals, flexibility, etc.
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Switching Between Funds
A well-chosen plan would provide an option to switch between the funds, adjusting the premium amounts, & making modifications depending on the financial objectives.
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Tax Benefits
The premium paid towards the plan is eligible for tax deduction u/s 80C & maturity proceeds received are exempt from tax u/s 10(10D) of the Income Tax Act, 1961.
How to estimate the amount to be saved towards the Child Education Plan?
It involves a lot of planning to estimate the amount of funds required to be saved towards a Child Saving Plan.
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Calculate the monthly savings & spending
Understand the monthly expenses to be incurred along with the monthly budget, depending on the household expenditures. This lets an investor ascertain the amount that can be set aside for investments.
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Determine the time required
Ascertain the time when your child would require funds, i.e. their milestones, such as school, graduation, post-graduation, etc. This will help parents to plan their investments in a better manner.
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Understand education costs
Assess the present & future education-related costs of one’s own country & overseas. These costs include books, tuition fees, travel, accommodation, etc.
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Rate of return
An investor should be well aware of the rate of return, i.e. the rate at which the investments will earn over time. The higher the returns, the more help you will get to achieve your objectives. This means that if an investment is chosen with a high return rate, the amount to be saved can be reduced on a monthly basis.
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Determine the influence of inflation
An investor, while making investments, should consider the inflation factor to avoid falling short of funds in future. Determine the best-suited amount to be invested by considering the inflation rate & what impact it will have in future.
Conclusion
Child educational plans are the smartest way parents can save for their children’s brighter future. In this uncertain world, it is advised to start saving early & receive funds at each & every milestone of life, such as school, college, or any specialised course, whatever the challenges may be. With an effective & smart mindset, it becomes possible to provide the best education to your children that they deserve.
