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.

Continue reading :

(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."

View Comments

  • Dear Srikanth,
    Both I & my husband are late investors(in early 40's) and have 2 kids (12 & 5).Due financial obligations we were not able to invest at all apart from buying a house.We earn up to 80k.Pls help us so that we are able to make the most even though we are late investors.
    God bless.

    • Dear Mrs Baig,
      Did you buy any Life Insurance plan(s)? Do you have any health insurance cover?
      (will surely guide you..)

      • Dear Srikanth,
        I went through your write up on Life Insurance Policies.I was thinking I'll close on HDFCs Click to Protect.
        I have been working as a consultant for the last 10 years.Joined on the payrolls a month back.Have opted for VFP(15%).I'm confused as to where we can invest.Will send my CTC and breakup of I cud get ur email ID(if that's ok with u)

        • Dear Mrs Baig,
          HDFC click to protect is a good choice. Do not postpone. Buy a good term insurance plan ASAP.
          You may contact me at sreekanth [at] relakhs.com

  • Hi Shreekanth,

    Thanks for writing good articles about investment planning, I read many of them found to be very useful for myself.

    I have a daughter of 2 month old. I want to invest on her name since today only, considering her education (at 17yr - tentative Degree in Engg or Medicine and marriege at age of 23-25 yr). Can you please guide me what step I need to take means policy to satisfy the needs.

    Currently I have below SIPs of total Rs. 7000/-
    1) UTI midcap fund (G) Rs. 1000/-
    2) ICICI Pru value Discovery Reg (G) Rs. 1000/-
    3) HDFC Equity fund (G) Rs. 1000/-
    4) ICICI Tax Plan Regular (G) Rs. 2000/-
    5) DSP Black Rock Tax saver fund Reg (G) Rs. 2000/-
    Also have below things
    LIC whole life plan Premium around Rs. 24000/- (sum assured 5 lacs)
    Mediclaim policy of ICICI PruLife Health Saver plan (Rs. 5 lac cover) for whole family with premium of Rs. 15000/-

    Also planning to have term plan HDFC Life's Cilck2Protect Plus (suggested in your article) for 1 cr.

    Please suggest what kindly of additional investment plan should I do and where ?

    Regards
    Dev

    • Dear Dev,
      Thank you for your appreciation.

      Appreciate your efforts to plan for your family's future.
      Kindly do not postpone the decision to buy a term plan. Buy it ASAP. When did you take LIC plan? (commencement date)
      All funds are good, except DSB tax fund. Consider Franklin Taxshield fund instead of it.
      Read my article on "Top up & Super Top up Health Insurance Plans".

      • Dear Shreekanth,

        LIC plan is taken in Mar 2012.

        Term plan - I am planning to buy HDFC click2protect plus - Life option for 1 Cr which i feel sufficient for me. While taking this plan do i need to inform about LIC whole life plan for sum assured of Rs. 5 lac ?

        Mediclaim - I have ICICI Pru Health saver plan for 5 lac per yr for me and dependants (wife and baby). I have taken this mediclaim policy in 2010 when i was unmarried and annual premium was Rs. 10000/-. After marriege i included wife and premium increased to Rs. 15000/-. Now I am in process of inculsion of baby name in this policy & might be premium will be increased by another 5000/-.
        Is this policy good one ? Do you suggest to quit this policy ? till date I have only claimed Rs. 5000/- for annual medical check up.
        Also I applied for inculsion of baby name in the policy but as per there clause baby name can be included only after 90 days of birth and I am not satisfied with this clause. Also any claim on baby can be claimed after policy anniversary year which is Mar 2016. Could you please guide how to tackle this issue ?

        • Dear Dev,
          LIC Policy - Consider surrendering it. Read my article "How to get rid off bad insurance?". But take HDFC Click2protect plus policy and then surrender LIC policy. Yes, you need to inform hdfclife about this policy.

          Mediclaim - I believe it is advisable to take health insurance cover from a standalone health insurer (like Star / Apollo/MaxBupa). The cost structure of ICICI Pru health saver is relatively high.

          If your health plan terms & conditions are like that, we need to abide by them.

  • i have 5rs girl child,if i invest 2500 in SSA account what will be the wxpected amount in her 21 years please send me the calculation sheet

  • Hi there
    I working in public sector and contributing 10% of my basic salary for my retirement under NPS,i would like to know if that's enough or need more savings for my post retirement life?

  • I have three girls under 5 years if I pay 500 monthly how much I gat after finish 18 years of child sir please send me calculation sheet. Waiting for your replay.

  • Thanks Sreekanth. Very useful message and hope everybody will get detailed presentation on their investments towards child education,Marriage Etc....... Our team often discuss about your blog -

    Already shared the details to many and will keep on doing.... Appreciate your efforts.....

  • Thanks so much Mr. Reddy. A lot of useful info but presentd such that a layman like me can also understand and grasp.
    Keep up d good work.

    And yes, will definitely share it.

      • Investment on SSA is wiser decision or not, as compared with any other sip. Please reply. Thank you.

        • Dear Rupesh,
          What is your child's age? Have you already earmarked any investments for her education goal?

  • Nice 1 Sreekanth..!
    Could you pls share the similar kind of calculator for better retirement income. (assuming 25k or 50k retirement pension per month including inflation,etc..)

    so many products are in the market from different financial company /Banks and MF, etc. -sometime it confuses..

    • Dear Muthu,
      I will surely write an article on the importance of RETIREMENT PLANNING and will also come up with a simple retirement calculator to calculate the required retirement corpus.
      I did not get the second part of your question. Are you confused about where to invest for accumulating your retirement fund?

  • Thank you so much Sreekanth, a lot of useful information to the beginners in personal finance. Outstanding job in making others educated in personal finance.

      • Dear Srikanth

        Please advice which is best option for invest in mutual funds considering kids future.
        My plan is to invest in SIP mutual funds with option of INR. 60,000 / year.
        Investment time will be from 5 to 10 years.

        Am just considering below option at present, if you have any better option please advice.

        1. HDFC Long term Fund. (Equity)
        2. HDFC top 200(G)
        3. HDFC Growth fund (Equity).

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Published by
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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