Smart Ways to Finance Your Child’s Education through Diversified Planning

I have a five year old daughter and at times I get really worried thinking about the future expenses I might have to incur, given the increasing costs of education. I wonder if the government is seriously considering this matter and going to take action any time soon.

These kinds of questions are practically in the minds of all the parents currently. The fees keep on rising every year. But unfortunately your salary might or might not rise at the same speed. So how does one go about securing a stable future for their kid? Well you have come to the right place. Today we shall explore the world of financial planning for education and explore how diversification can make your education savings journey more stable and rewarding. 

Understanding the Importance of Education Savings:

It's never too early to think about your kid’s future education. Higher education can open doors to better opportunities and help you reach your goals. However, the cost of education is on the rise. This is where financial planning comes into play. 

Financial Planning - Beyond Piggy Banks and Savings Accounts:

Gone are the days when saving money meant stashing cash under the mattress. Today, financial planning is a strategic approach to managing your money, ensuring you have enough for your needs and aspirations. In the context of your child’ education, it means setting aside funds specifically for their educational journey.

Diversification - The Secret Sauce of Stability and Growth:

Now, let's talk about diversification. Imagine you're planning a picnic, and you're not sure about the weather. Instead of relying on just one game, you bring a variety of indoor and outdoor activities to ensure a fun time no matter what. Similarly, diversification in finance means spreading your money across different investments to reduce risk and potentially increase returns.

How Diversification Works for Education Savings:

Let's break it down with an example. Meet Rahul and Sneha, both saving for their education. Rahul decides to put all his savings into a fixed deposit, hoping it'll grow. Sneha, on the other hand, diversifies her savings. She invests in mutual funds, stocks, and bonds.

Table 1: Rahul's Fixed Deposit vs. Sneha's Diversified Savings

In this example, Rahul's money grew, but Sneha's grew even more due to the power of diversification. By spreading her money across different investments, she tapped into various growth opportunities.

Let’s take your example. Your daughter who is currently 5 years old will seek professional courses like Engineering or Medicine in the next 13 years. Let’s say you want her to pursue Medicine. Now if the cost to secure admission in MBBS college on today's date is Rs. 5 lakhs, let’s figure out how much it will cost to send your daughter to a medical college in 13 years.

As it is clearly visible that the cost of education by the time she completes her 12th and enters medical college after 13 years will rise to Rs. 20.88 Lakhs owing to inflation. And in order to achieve this goal, you will have to invest Rs. 6,134 per month, assuming you earn a return of 12% per annum.

Now let’s say due to some financial emergency or constraint at home you delay the investment and start five years from now, then the investment per month will be almost triple i.e., Rs. 17,754.

Planning Beyond Tuition Fees: 

Always be prepared for extra expenses, including accommodation, living expenses, tuition fees, and more. When your child reaches high school, additional costs beyond school fees may arise.

These seemingly minor expenses can accumulate significantly, especially if your child plans to pursue undergraduate or postgraduate studies abroad.

Once your child secures admission, you may discover various unanticipated costs, from airfare and housing to personal expenses and insurance. However, with proper planning, these expenses can be manageable. Consider reaching out to alumni parents or the alumni themselves to gain insight into the overall financial outlay for the duration of the course. This can help you estimate potential expenditures. Even after careful budgeting, it's wise to set aside a financial cushion for unforeseen expenses. That’s where a diversified savings option comes to your rescue

What are Diversified Education Savings Options:

1. Mutual Funds: These are like investment baskets that hold a mix of stocks, bonds, and other assets. They offer potential for growth and are managed by experts.

2. Stocks: Investing in shares of companies can be rewarding but carries more risk. The stock market often grows over time, providing bigger profits.

3. Bonds: Bonds are loans you make to firms or governments in return for consistent interest payments. They are generally considered lower risk compared to stocks.

4. Savings Accounts and Fixed Deposits: These are low-risk options where your money earns interest over time. While the returns might be lower, they're quite safe.

5. Education Savings Plans: Some financial institutions offer specific plans designed for education savings. These plans can provide tax benefits and structured investment options. 

Benefits of Diversification

Diversification is like not putting all your eggs in one basket. It helps you reduce the risk of losing all your money by spreading it across different investments. This way, you have a better chance of making money over time.

Protects Against Market Volatility:

Financial markets can be unpredictable, like a roller coaster with its ups and downs. Diversification acts as a seatbelt, cushioning the impact of market swings. When one investment isn't performing well, others might be thriving, helping to balance out your overall returns.

Reduces Emotional Stress:

Investing can be emotional, especially when markets are turbulent. It reduces the pressure to constantly monitor one investment's performance. Instead, you can relax knowing that your overall portfolio is designed to weather different market conditions.

While diversification is fantastic, it's essential to consider your own risk tolerance. Are you comfortable with the possibility of higher returns but also the chance of temporary losses? Or do you prefer lower but steadier growth? Your risk tolerance guides the extent of diversification you choose. The table below should give you a better understanding:

Incorporating Diversification into Your Strategy:

1. Assess Your Goals: Determine how much you need for education and how long you have to save. This helps shape your investment horizon.

2. Create a Mix: Based on your risk tolerance and timeline, create a diversified portfolio that combines different assets like stocks, bonds, and mutual funds.

3. Monitor and Adjust: Regularly review your investments. If one asset is doing exceptionally well or poorly, rebalance your portfolio to maintain diversification.

Conclusion:

As you embark on your child’s educational journey, remember that financial planning isn't just about money – it's about building a secure and rewarding future. Diversification is the key that unlocks stability and growth in your education savings. By spreading your investments wisely, you're not just saving for an education; you're investing in your child’s dreams, her potential, and her future success.

So, go ahead and be the architect of her financial future. Follow a sensible approach to carry out your obligations to your child's education. Don't follow the crowd because everyone has distinct financial situations, circumstances, and ambitions.. With smart diversification, you're well on your way to conquering the world, one education-savings step at a time!