Ajay was feeling a little confused as he heard Raghav and Abdul talk about the problems they faced while planning their children's education. Raghav had bought a child insurance plan for his son's education, but the amount was insufficient. Abdul had reduced his retirement allocation to contribute more for his daughter's education and was worried that he may be left with a smaller retirement corpus.
What went wrong
Both Raghav and Abdul made the following fundamental mistakes:
- Never buy insurance in the name of the child. Your child is not the earning member of the family. You and your spouse who need to be insured. Child cover plans are hybrid products that mix insurance and investment, and hence, are ineffective.
- Instead of compromising on the retirement corpus, Abdul should have focused on starting his child's planning earlier.
Ajay should, instead, follow these steps to safeguard his child's future:
Integrate children's education into overall financial plan
Ajay must not treat the plan for his daughter's education as an isolated item of saving, but as a part of his overall financial plan. Currently, he has a monthly take-home income of Rs 2 lakh and expenses of Rs 1.1 lakh. He invests Rs 55,000 in bank deposits and Rs 35,000 in Systematic Investment Plans, monthly.
He needs Rs 1.5 crore for his child's college education. He can reach this amount if he starts a SIP of Rs 22,500, assuming he invests in an equity fund yielding around 15% annualized over 15 years. He can carve this out of his current monthly SIP. He can invest the remaining Rs 12,500 in an equity fund. Over the next 25 years that will be worth Rs 4.11 crore and coupled with his Provident Fund it will be a substantial retirement corpus.
Allocating Rs 55,000 just to bank FDs is not tax-efficient. He can look at investing in debt mutual funds that are more tax efficient and have similar risk profiles.
Start as early as possible
The earlier you start, the more returns your money earns. That is the power of compounding. Let us assume you have a monthly SIP of Rs 5,000, offering 15% yield. If you start at age 25 and save till age 55, the amount will grow to Rs 3.51 crore over a 30-year period. If you start at age 45 and save till age 55, the amount will grow to Rs 13.93 lakh over a 10-year period.
Invest in equities for the long term
When it comes to planning for your child's future, there is nothing like equities to create wealth in the long term, minimal downside.
Buy the right life insurance cover: If you and your spouse are the breadwinners, then you need to be insured. The term plan will ensure that even in your absence, your child's education goes through unhindered.
SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds
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