Categories: Financial Planning

Calculate how much you need to invest for your Kid’s Education

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.

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(Image courtesy of photostock at FreeDigitalPhotos.net)

This post was last modified on July 10, 2023 12:02 pm

Sreekanth Reddy

Sreekanth is the Man behind ReLakhs.com. He is an Independent Certified Financial Planner (CFP), engaged in blogging & property consultancy for the last 14 years through his firm ReLakhs Financial Services . He is not associated with any Financial product / service provider. The main aim of his blog is to "help investors take informed financial decisions." "Please note that the views given in this Blog/Comments Section/Forum are clarifications meant for reference and guidance of the readers to explore further on the topics/queries raised and take informed decisions. The information provided, therefore, should not be viewed as financial, legal, accounting, tax or investment advice."

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  • Dear Sreekanth

    Thank you for putting down a lot of useful information regarding the personal finance.

    I am 29 years old married with 2 years old daughter and 1 year old son. I did not buy any term insurance plan since my family is not dependent entirely on me. I am investing 1 Lakh per year in Sukanya Samriddhi Scheme since 2015.

    Presently I am holding 2 mutual funds:

    1. SBI Blue Chip Fund (G) - SIP - 4000 /-
    2. L& T India Prudence Fund - Direct (G) - SIP - 2000 /-

    I am planning to invest 8000 rupees per month for the below funds:

    1. Mirae Asset Emerging Bluechip Fund (G) - 3000/-
    2. DSP - Black Rock MicroCap Fund (G) - 3000 /-
    3. Kotak Select Focus Fund (G) - 2000 /-

    Please advise if the above MF allocation is proper or do I need to modify it. My goal is towards my kids education, marriage and retirement planning. My investment horizon is at least 15 years. Also I would like to know if it is better to go for a Direct Mode rather than Regular Mode for the above Mutual Funds.

    Thanks.

  • Hello Mr. Reddy,
    Awesome work and enjoyed reading your articles.
    I am 33 year old married with 2 year old son and having term insurance 50 lakh and 3 lakh health insurance for family
    Currently I hold 5 mutual funds namely HDFC prudence, HDFC top 200, ICICI focused blue-chip, reliance small cap and reliance tax saver fund investing 2k each per month. Please advise is the MF allocation is proper or do I need to modify focusing my sons education and his marriage.
    Also currently I am living on rent and want to save some money for my house purchase and initial installment. And I can add another 10K in MF. Please advise and suggest where and which is the best way to invest and allocate money for future financial security.

  • Dear Sreekanth:

    Hope you are doing fine today.

    I planning for retirement plan & child education plan. My age is 35 and would like retire at 60. I can invest around 20k p.m. Could you please advise what would be best option.

  • Thanks for the detailed good article.

    I have shortlisted these 10 funds as my portfolio (for my daughter's education and marriage -aged 9). Please review it and suggest if i should drop few of them or go with all of them for long term.

    Franklin smaller co.
    ICICI Prudential Balanced Advantage Fund
    Reliance Small Cap
    UTI Transportation and Logistics Fund
    Tata Balanced Fund
    ICICI Pru Value Discovery Fund-Reg(G)
    ICICI Pru Exports & Other Services Fund-Reg(G)
    Franklin India High growth co
    Idbi India Top 100
    HDFC Mid-Cap Opportunities Fund(G)
    ICICI Pru FMCG Fund-Reg(G)

    I try to add spare lumsum amount every 3 months (about 20K total). I distribute the total money in each of these (excluding the sector funds).

      • As such there was no particular reason for that. I just thought to distribute the investment for lower risk. And i now think that these are too much. So just trying to get an answer for , which one should i remove from my portfolio as per your thoughts. If you can help, it will be great.

        • Dear Neha,
          Given a choice, I will consider keeping below funds;
          Franklin smaller co.
          Tata Balanced Fund
          ICICI Pru Value Discovery Fund-Reg(G)
          Franklin India High growth co
          HDFC Mid-Cap Opportunities Fund(G)

  • Good Work Sreekanth, just got to know about your posts from my friend and glad that I am reading through this. Thanks for all the useful information

  • Hi Sreekanth,

    I have two kids aged 5 and 3 years. Kindly suggest best ways to invest for their education. I can invest up to 20000 per month. And what would be the best time frame to accumulate money for my kids education.

    I have SBI term insurance plan and health insurance provided by my company.

    Thanks,
    Shanthi.

  • i have 1 daughter age 3 and son age 1

    i dont have MF and SIP

    only term insurance total 1.20 cr in 3 different companys

    01.icici pru life icare protect 40 lakhs (2011)
    02.Exide life my term insurance 25 lakhs ( 2013 )
    03.Birla sun life 56 lakhs (2014)

    and Health insurance 5 lakhs and critical illness 20 lakhs

    my child future can't saving amount in case anything happen my died my cover 1.20 cr my child and wife future expenses

    and addition income plan i try

    which plan child insurance ULIP or sip or SSY

    help me

  • Hi Sreekanth!

    I have very less idea about mutual funds and SIPS's. I am a 30 year old and have twin daughters who are 1 year old.
    I have already invested 1.5 lakh per year for each in Sukanya Samriddhi Yojana.
    Can you suggest SIP's or mutual funds or debt funds for 10 - 20,000 per month to help me accumulate good money and please suggest time duration.
    I have no particular goals.
    Also, I'm very particular that I don't lose my primary investment money.
    My monthly earnings - 1 lakh per month (30% bracket).

    Any help will be sincerely appreciated.
    Thanks and regards!

  • Hi Sreekanth, I like your blog as it is easy and simple for layman. I have 2 questions.

    1) I have Rs 100000 surplus to invest (after exhausting PPF and four equity MFs) if I want to invest one time for 3 or 5 years which is the best investment option. Don't want to invest in multiple MFs as it will complicate record keeping.

    2) If any of my MF schemes don't do well, after redeeming where should I direct the money to create a surplus instead of putting in idle Savings or FDs.

      • I have the below
        1) Icici focussed bluchip Direct
        2) DSP Black rock Top 100
        3) ICICI Value Discovery
        4) HDFC balanced

        • Dear Suresh,
          Invested funds are good ones individually.
          But 1 & 2 are from the same fund category - Large cap. This may lead to portfolio overlap. You may consider to exit from one fund and add one Mid cap fund like UTI midcap / Franklin smaller co's fund for long-term.
          Invest Rs 1 Lakh in HDFC balanced fund ( 3 to 5 year time-frame).

          Read my articles;
          Best Equity funds
          MF portfolio overlap analysis tools.

          • Isn't it a better option to put 100000 in a debt fund and open a STP to another mid-cap equity fund? I believe this will get better returns over the period.

          • Dear Tarun ..Choice is yours. But kindly note that STP transactions are treated as Redemptions and Capital gain taxes (if any) are applicable.

          • Thanks for the response, this probably answers my today's query as well. I am new to investment field and still in learning phase. Until today I was under impression that the best way to park lump-sum amount (around 7-8 lakhs) is STP only. But probably I need to start from scratch on this plan. Could you please advise what could be the best option to invest this amount? This lump-sum amount is available for long term and it is calculated after creating sufficient FD's for next 2-3 years. Also ELSS SIP's are in place as well.
            Thanks in advance !

          • Thanks again Sreekanth !

            Now if I want to invest remaining lump-sum amount for 1 and 2 years time frame (based on when I need that money). Is FD the best option to invest for short time frames of 1-2 years or less? Please advise.

  • I have 4 SIPs
    1.Balanced- rs 1000/- 5 yrs
    2.Multi cap- rs 1000/- 5 yrs
    3.Elss Rs4000/- 12 yrs
    I want to add a Mid cap to the mix for SIP of Rs1000 for 5 yrs. Can u please advise I am looking at 2 options the more stable FT Smaller cos or the high risk &reward Mirae asset blue chip
    I

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Sreekanth Reddy
Tags: Financial literacy financially literateFinancial Planning PyramidFV FunctionKid's education goalPersonal Financial Planning - List of ArticlesPMT Function
July 10, 2023

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