Providing your child with the right education is not only a responsibility but also a long financial commitment. Good schools don't come cheap and these days, even preschools have a waitlist! The competition is fierce not only for children but also for parents who are fighting to get their children the best education possible.
With a child education plan in place, you can come out miles ahead in this race! With a child investment plan in place, you can slowly build a comfortable nest-egg for the essential milestones in your children's life-college education in premier institutions, healthcare, foreign education, marriage, etc.- and also provide them with financial security in case of contingencies.
What is Child Education Planning?
The basics of child education planning lies in setting aside a particular amount of money on a regular (monthly/bimonthly/annually/one-time payment) basis and keep adding for years, till you save a pre decided amount. Saving can be done, depending on which mode you enjoy.
The best way to approach saving and investment for your child is by starting an investment while the child is still young (3-5 years). There are various instruments available at your disposal, such as PPF accounts, NSC accounts, Fixed Deposits, Equity Investments etc. which you can choose according to your convenience and knowledge or risk appetite.
Thus, while saving in safe instruments like bank PPFs and Fixed Deposits is always a safe option, the returns are very low and savings accounts cannot protect you against inflations and economic downtime. With unpredictable times ahead and world economies crumbling, the amount you save in these safer instruments might not even cover half the cost of your child' s education and other needs.
Comparatively, saving with investments is a far better option, even if you are a low risk taker when it comes to money. Investing in equity or buying a child plan are effective methods which can provide high returns.
Child Education Plans are insurance cum investment plans which help you build a categorized corpus for your child's essential requirements. It is a systematic investment plan where you begin by calculating first the amount you will require for your child's education, using a child education planner.
What is a Child Education Planning Calculator?
The Child Education Planning Calculator or child education planner is an online calculator available to help parents calculate the amount they will be needing over the years for their children's education and other essential needs.
With a child education calculator, you can get a real time estimate of the amount you need to set aside for your child's education. The child education calculator uses a formula which takes into account variables for expected rise in inflation, your children's age now and when they would be needing the money and the current amount you have invested or saved up already for the children's benefit.
Saving for your children's education can be tricky if your goals for them are not clear. This includes thinking about whether your children want to pursue a professional course such as engineering or medicine and if so, whether they would do it from a premier institution in the country or go abroad for further studies like a Masters' degree or an MBA. Many children today are opting to go for unconventional careers and want to pursue subjects such as textile design, graphic designing, art history, linguistics etc. from elite institutions in foreign locations.
Even pursuing a conventional professionals degree in India can be a difficult affair. With competitions getting tougher each year and rising tuition costs, going for professional courses like engineering, law, medicine etc. from a National institute like NLU or AIIMS or from a premier private institution can also cost upto a few lakhs per year.
The cost of education not only includes the amount you need for tuition but also other essential expenditure such as room and board, dining, extra curriculars etc. Hostels and campus living arrangements are mostly borne by students, even when they are on scholarship. This means spending at least an extra lakh or two per annum on essentials and that is the going rate today.
A couple of years down the line, these costs will increase manifold due to inflation and your current savings might fall short by the time your child reaches college. You can opt to take out an education loan but the high rate of interests can make the payoff quite a difficult affair.
It is important that you spend some time and research various child investment plans. Review your current finances, savings and future investments to arrive at the current amount you are either saving or are willing to invest for your children's future needs. This not only includes education costs but also healthcare, insurance, investing in your child's hobby or talent (sports, music, dance etc.) and also an amount to cater for unforeseen emergencies like your untimely death or disability.
Once you have a fair idea of your current financial state, make use of utility tools like a child planning calculator to determine the cost of your children's education in the future and also get an idea on the amount you must set aside monthly to reach this goal. The child plan calculator gives you an estimate in seconds and you can use this number to start saving for your children's future.
How Does a Child Education Planning Calculator Work?
The child education planning calculator uses the idea of future value to calculate the accumulated corpus at the time of the child’s higher education. The formula used is:
FV = PV (1+R)^N FV
FV =Future Value
PV = Present Value
R = Rate of return on the investment
N = Duration or time-frame of the investment.
For instance, if your child is 3 years old and will be in college when he/she is 18 years old, you need to calculate the amount your child will need 15 years (18-3) from today.
Let's assume the current day cost of education is INR 8 Lakh for a particular course. Assuming an inflation rate of 6%, the future cost of education according to the child education calculator will come out to be as follows :
PV =8 Lakh
N= age of child at the time of college - present age of child = 15 years
FV = 8,00,000 (1+0.06)^15 = ₹ 19,17,247
Thus, you will need ₹ 19,17,247 when your child will be starting college.
Let's assume that you have not set aside any savings for your children's education up till today. If you start a child investment plan today, assuming a return of 7% per year and using the PMT Function in Excel (7/100/12) to convert this return to get a monthly return rate, you can calculate the period of investment in months.
15*12 = 180 months
PV = 0
FV= ₹ 19,17,247
Using FV = PV (1+R)^N FV , we get a value of ₹6,049.
Hence, you need to save ₹6,049 per month for 15 years to fulfill your child's future education needs.
This is the formula of future value that an online child education planner also uses to calculate the amount you will need for future education needs.
How to Use The ClearTax Child Education Planning Calculator?
The ClearTax Child Education Planning Calculator is an online utility tool which gives you an adequate estimate of the amount of money to be set aside for your children's education. You can simply access the calculator here and enter the following details :
- Present Cost Of Education
- Expected Inflation Rate per annum
- Current Age of Your Child
- Age When Your Child Will Need This Money
This will give you the amount you will need at the time of your children's education or other needs.
If you have already started any investments for your child or have set aside money in an instrument for a similar purpose, please enter the amount invested in the box and slide the scale over to enter the percentage of return you expect on your investment. This will give you the amount you need to invest on a monthly basis to reach your goal of saving the amount calculated above.
Benefits of Using Child Education Plan Calculator
Saving money is always a good idea. Having neat, separate financial goals set aside for life's important milestones such as buying a house or a car, saving for your child's education and marriage, retirement planning etc. keeps you grounded and in clarity of the direction you want to proceed in. Once you have these goals clear, you can proceed systematically and also develop a financial foresight which can save you from incurring a loss or protect you in time of an emergency. You also ensure that your loved ones are financially protected long after you're gone, leaving behind a solid and financially sound legacy.
You can get started on this road to financial wisdom by getting a tangible & workable 'number', using the child education plan calculator and start working towards it today!
The benefits of using the ClearTax child education plan calculator are as follows:
- It offers the dual benefit of giving you an ideal, long-term saving goal and also getting you started on the goal by giving you an exact amount to be set aside every month.
- You get a clear idea of the amount you need to build a kitty, depending on your plans. Thus, your saving goal will differ when you save for your child to get an Indian education versus a foreign, Ivy league degree.
- Depending on the amount and your timeline, you can compare the rates of return on various saving instruments and choose the best mode of savings and investment, which helps you build the corpus in target time.
- Besides education, this money can be used for your children's other essential requirements. The amount you save in a child education plan can also be withdrawn periodically and used to cover costs for other purposes such as emergency medical expenses, marriage expenses etc.
- Using a child plan calculator, you can buy a child investment plan and use it as collateral for an education loan to send your child to a prestigious institution in India or abroad.
- The amount you set aside can be used for supporting your child's extracurricular activities and talents.
- The amount saved in a child investment plan can provide financial stability in case of your untimely demise. Financial planning can ensure that your children are protected when dealing with a parent's loss and their life or plans are not disrupted.
- Inculcate a habit of regular saving and build a discipline in order to achieve a long-term saving goal. Some child plans offer an income of upto 1% of the total sum to children to help get them on their feet.