How to prepare a savings plan for children's education?

The first time you held your child in your arms, you felt like there is nothing that you would not do to ensure your little one's happiness. Your child may have grown up over the last few years, but she will always be your little one for you. Every time your child asks you for anything—a new toy, books, or a laptop, your goal is to get your baby whatever she wants. Parenting is a responsibility to ensure your child's well-rounded growth. All your efforts are directed at raising an adult who is primed to succeed in the world. Your task is to meet your little one's emotional, mental, physical, and financial needs.

Along with planning for your retirement, financial planning for your child is one of your top priorities. As your child grows up, her financial needs will also increase. There will be college fees to pay, other higher education costs to meet, a wedding to plan, and so much more. Are you financially prepared to meet these needs?

Guide to create a savings plan for children's education

It is ingrained in the mind of every Indian parent that quality education is the best gift that you can give your child. All parents want to ensure that their children go to the very best schools and colleges to pursue their dream careers. While education remains a high-priority item on every parent's checklist, the increasing costs of education cause concern. What you need is a savings plan to help meet your child's education goals.

Step 1. Do the math

Creating a child saving plan need not be complicated. To start, all you need are two essential estimates—the future value of your financial goal and the time you have to achieve it.

Time horizon

Calculate how many years you have, before your child needs funds for higher education. The longer the time horizon, the more time you have, to get a child plan started. Funding your child's education is a goal, that you should start investing in as early as possible.

Education costs

As per the National Sample Survey Office (NSSO), the average yearly private expenses for primary to post-graduate education have gone up by over 175% from 2008 to 2014. The yearly cost of technical and professional courses has risen by a whopping 96% during the same time. One of the primary steps then is to estimate the cost of education for courses you think are relevant for your child.

Inflation adjustment

Do not neglect the impact that inflation can have on the future value of your savings. Whatever education cost estimate you arrive at, you need to add 8-10% rate of inflation. An amount that would meet needs today will be woefully inadequate 10-15 years from now. Add inflation costs to today's education expenditure to arrive at your financial goal's future value to meet your child's education requirements.

Step 2. Reverse engineer your current costs

Once you know how much you need to save for your child's future education needs plus inflation, reverse engineer your time horizon to understand how much you need to save today. Instead of banking on an influx of a large amount of money, make the most of the power of compounding by starting early and saving consistently.

Step 3. Don't cannibalise your investments

Often, people dip into existing investments to pay for immediate expenses. However, if you hope to meet long-term education goals, you must maintain strong financial boundaries with yourself. Do not dip into your child saving plan to meet low-priority goals such as buying a vehicle or renovating your house. Similarly, do not dip into other high-ticket investments such as your retirement corpus to fund your child's education. The goal is to streamline your portfolio and plan to create wealth with the right financial instruments and for the right purposes.

Step 4. Ensure you are adequately insured

Even the best-laid plans face potential setbacks in the face of life's uncertainties. While you bulk up your financial portfolio with a children's endowment policy or other child saving plan, it is of utmost importance to ensure that the parents are adequately insured. In an unfortunate situation such as a parent's death or disability or critical illness, a child's dreams are likely to be sacrificed. Adequate insurance is necessary to ensure that your child's fees, tuition expenses, and other education costs are taken care of in your absence or illnesses.

Step 5. Invest smartly

Allocate your assets to suitable investment instruments, so your money works hard to make more money for you. Consider your risk appetite and if it needs to change to battle inflation. Will a child saving plan suffice? Do you need a children's endowment policy, or will investing aggressively in a market-linked ULIP child plan serve your needs better?

Government schemes

The Government of India has floated many schemes designed to make it easier for people to save systematically. Some of these schemes offer specific benefits for children.

Sukanya Samriddhi Yojana

Launched in 2015 under the Beti Bachao, Beti Padhao initiative, the Sukanya Samriddhi Yojana allows you to open a savings account for your girl child. This small deposit scheme is designed to help you build a corpus to meet the education and marriage-related financial needs of a girl child. The lock-in period for the SSY is 21 years or age at marriage, whichever comes first. Keep in mind that the interest rates are subject to change at the central government's discretion. As of March 2021, the SSY offers an interest rate of 7.6% pa, lower than the 8.5% pa provided in 2020.

PPF for child's education needs

PPF or Public Provident Fund is a government scheme with a lock-in period of 15 years and partial withdrawal facilities after the sixth year. A PPF account is a risk-free way to enjoy the benefits of compounding and get tax benefits under section 80C of the IT Act. However, keep in mind that PPF is a debt-based investment instrument with a limit on how much you can invest in any given year. Such returns received may not be enough to cover all your child's education needs.

Child insurance plan

A child plan or a child insurance policy is an insurance instrument that helps you create a stream of wealth for your child's future, secure your child financially, and make provisions to keep your child's dreams on the track to fulfilment even when you are not around. A child plan helps financially plan for your little one's future when they are still young, and you have the time you need to do it right. Whether you are hoping to save for your child's higher education needs or marriage expenses, a child plan helps you secure your child's future today.

With a good child policy in India, you can avail of periodic pay-outs to meet a milestone expense, a maturity benefit at the end of the policy term, and a death benefit paid out to your child in the case of your untimely demise during the policy term. A participating child saving plan also offers bonuses (if any) in addition to the guaranteed pay-outs assured to you at the time of purchasing the child plan.

Types of Child Insurance Plan

A child plan is an insurance-cum-investment tool that serves multiple objectives with a single focus—your child's financial security. Insurance plans for kids cover the policy holder's life to ensure the child's financial health in the unfortunate event of the premium-paying parent's death. Also known as a child higher education plan, a child insurance plan ensures financial support for your little one at essential higher education stages.

Money-back child saving plan

In a money-back child saving plan, your life is insured for a fixed sum assured that is paid to your nominee as a death benefit in case of your demise. Throughout the tenure of the policy, periodic money-back payments are provided as survival benefits. Before choosing a money-back child saving plan, consider whether your chosen instrument is capable of offsetting the rate of inflation.

ULIP child plan

A market-linked child plan is a non-traditional financial instrument that depends on market movements to offer you returns. Under a ULIP child insurance plan, your nominee would receive a lump sum death benefit and the fund value at the time of maturity of the policy. Depending on your risk appetite, you can choose to invest your money in equity, debt, or a balanced combination of both.

Children's endowment policy

In a children's endowment policy, you can bank on an assured sum that is guaranteed at the outset. With a children's endowment policy, your nominee gets a death benefit or maturity benefit along with bonuses (if any are declared).
IndiaFirst Life Little Champ Plan is a non-linked, participating child insurance plan that offers regular guaranteed pay-outs, in-built waiver of premium (WoP) benefit, and 8 flexible pay-out options. This children's endowment policy allows you to select a policy term that pays dividends when your child will need it the most.

Equity Mutual Funds

Investing in diversified equity mutual funds or ULIP child plans is a viable option for those with a higher risk appetite. If you have started planning for your child's education early, you may choose to park your money in mutual funds for long-term gain. Steer your money towards balanced funds to create a corpus to be used in the short-term. For longer-term financial goals, you can plan systematic investments in mid- and large-cap funds.

Do you need a child plan for education expenses?

The benefit of having the world wide web at your fingertips is that you can take advantage of varied perspectives. Critics of child education plans believe it is better to invest in mutual funds and a term insurance plan than to opt for a child insurance plan. By separating your insurance and investment needs, they say, you are better-placed to have a larger corpus at the end of the tenure you have chosen.

However, a crucial consideration is missing in this argument. What happens if you get a term plan and begin investing in mutual funds but unfortunately pass away 5 years into your financial planning for your child? Your nominee will receive a pay-out from the term insurance plan, which will be directed towards meeting day-to-day and immediate expenses. Meanwhile, your mutual fund investment plan comes to a standstill.
In the same situation, a child insurance plan would provide a death benefit from its insurance component, and will continue investing for the child through the tenure of the child saving plan. This Waiver of Premium (WoP) benefit is inbuilt in the best child insurance plans and policies such as the IndiaFirst Life Little Champ Plan. The untimely demise of a parent or the life insured need not ruin the investment plans made for the child.

Conclusion

As with any other investment, it is important to remain disciplined while saving. Do not let short-term needs get in the way of saving for your future goal. Providing your child with the best education and living standards has been your dream for a long time—perhaps even before your child was born. Understand how much you need to save, choose the right child plan to meet these goals, and do not let anything come in the way of you realising your dreams.