How to plan for education expensesNovember 4, 2014
I the Bollywood flick "Three Idiots", the lead protagonist (Aamir Khan) talks about the education system in India and the pressure a child has from the parents and the ecosystem in which heshe lives. Right from birth, parents want their child to become a doctor, or a pilot, a police officer, an engineer, etc. No wonder this is the most important financial goal in almost every parent's life in India. So much so Raj Malhotra (Amitabh Bachhan) had to withdraw his entire PF money to support his son's higher education in another Hindi movie, "Baghban". As a caring parent you would always want your child to get the very best, especially education. When we meet most of the to-be parents or just havebeen parents, the top priority we find is to plan for the child's education. According to a 2011 ET Wealth study, a middle class family spends around Rs 54.75 lakh to raise a kid from cradle to college in a metro city, excluding higher education costs.
When Gaurav Mody and Urvi (names changed) visited us to plan for their one-month-old daughter Dia's education requirement, they were shocked to see the cost of education in today's terms as compared to what they have incurred for themselves. Today, the cost of education for the child starts right from the pre-nursery school and the inflation in education sector is more than 10% annually for the kind of school most parents want to send their kids too.We discussed the cost of Dia's education right from primary to higher education.
We have considered a diversified equity mutual fund for this purpose and an average return of 12% compounded annually. We also assumed that they need to withdraw every year the required amount to fund the respective fees for the year. The table suggests that we need to keep aside Rs 15,000 per month for the next 24 months, which is a total of Rs 43.2 lakh to fund the education goal Based on the table, it is clear that the total cost of education is a whopping Rs 1.6 crore in future value and the idea is to start a regular monthly investment right from today till Dia finishes post-graduation.
The writer is MD & CEO, Etica Wealth Management