As a caring parent you would always want your child to get the very best. With growing standard of living, the Kid’s education expenses are consistently rising. I believe the average rate of education inflation (the rate at which education expenses are rising) is around 10% to 15% depending on the location.
In this post let us understand – How to calculate the future value of Kid’s Education Goal amount? How much should you save/invest for your kid’s College education?
Calculate the Future Value of Kid’s Education Goal Amount
For calculating the future cost of education expenses, you need below details:
- Kid’s age
- No of Years remaining to attend college
- Current value (cost) of College Education. You may have to do little bit of research to find out the average cost of college education in your preferred location.
- Education Inflation (We can safely assume this as minimum 10% 🙂 )
Let us do the calculation with an example.
Example – Mr Sundaram wants to plan for his kid’s higher education. Child’s age is 5 years and will attend college in 12 years from now. As per his research, he came to know that the current cost of Engineering Education in his city is around Rs 5,00,000. He wants to find out what is the Future cost of his goal?
I have used MS-Excel’s FV function to calculate the future value of goal amount. (FV Function variables are Rate 10% from B4 cell, Duration 12 years from B3 cell and Current cost of education Rs 5 Lakh from B5 cell). So, at 10% inflation rate the college expenses of Rs 5 Lakh will become Rs 15.69 Lakh in 12 years. Mr Sundaram has to accumulate this amount for his Kid’s education.
(For detailed explanation on “How to calculate Future Value?’ – Click here )
How much do I need to invest for my Kid’s education?
Mr Sundaram now knows that he requires around Rs16 Lakhs in 12 years from now. He further wants to calculate how much he has to save every year to achieve the goal amount. He also wants to find out how much he should save if he opts for Fixed Deposits (or) Mutual Funds (or) Stocks?
I have used MS-Excel’s PMT function to calculate the required Yearly Savings amount for Kid’s education. ( PMT function’s variables are D9-Rate-9%, B3-Term-12 years and B7 -Target Goal Amount-Rs 15.69 Lakh).
Scenario 1 (If Savings are invested in Fixed Deposits)
Mr Sundaram has to save Rs 77,913 per year for the next 12 years to achieve his goal amount of Rs 15.69 Lakh. The yearly savings amount is invested in Fixed Deposits which may give 9% returns. (You may refer the above “PMT function” image on how to calculate.)
Scenario 2 (If Savings are invested in Mutual Funds)
Mr Sundaram has to save Rs 73,382 per year for the next 12 years to achieve his goal amount of Rs 15.69 Lakh. The yearly savings amount is invested in Mutual Funds and he expects 10% returns from Mutual Funds.
Scenario 3 (If Savings are invested in Shares)
If Mr Sundaram decides to invest in Stocks then he has to save Rs 65,023 per year for the next 12 years to achieve his goal amount of Rs 15.69 Lakh. The stock investments may give him returns of 12%.
Important Points to Ponder upon
- You can consider the above yearly savings amount (I have provided a calculator below. You can use it to know your goal amount) as the minimum contribution amount that you need to save/invest. As and when your income increases you can keep contributing more towards your yearly savings. Accordingly, you can re-calculate the required Target goal amount as explained above.
- If you choose to invest in mutual funds (or) stocks then it is better to move your fund to Safe Investment avenues like Fixed deposits, atleast 2 or 3 years before the Target goal year. By doing this you may prevent the accumulated fund from eroding. (Read : ‘Best Equity Mutual funds‘)
- Besides these savings, have a good life insurance coverage. Consider taking Term insurance plan (if you do not have). It is better to avoid Child Education Insurance plans. I believe Balanced Mutual Funds with the combination of Term Insurance plan may prove to be a good decision. (You may like visiting my post on “Best Balanced Mutual Funds.”)
- Do not buy a financial product just because the scheme name has “Child plan” on it. Understand the features, benefits and risks associated with that investment option.
- Regularly monitor and track your investments. Also, be informed regularly of the cost of education for various courses.
- After reaching the goal year, based on the fee payment conditions (like one time payment or per year basis) you may still need to manage the fund carefully.
Download Calculator – Kids’ Education Goal amount . (In-fact you may use this calculator for any accumulation goals like vacation planning, Marriage expenses etc.,)
Liked the post? Please share it with your friends. What is the average per year increase of cost of college education in your location? Kindly share your comments.
Continue reading :
- List of Articles on the key Components of Personal Financial Planning
- Retirement Planning in 3 Easy steps
- The importance of numeracy in becoming Financially Literate!
(Image courtesy of photostock at FreeDigitalPhotos.net)