Education is highly valued in the Indian culture and society. So having a good education plan for kids is very important. Every parent wants to do the very best for their children, and for many giving them the best education possible can be a high priority. However, you also have to plan carefully so that you have enough money to support your lifestyle, pay off your mortgage and save for your retirement. For this it may be in your family’s best interests to put aside extra money for their education. Because you love your children and because you want what’s best for them and your entire family, having a solid education plan is a must.
So work out how much you can really afford to save for your kids’ education. Be realistic with your education planning – while inflation sits at less than 7-8%, education expenses typically rise 10-12% every year. Ensure your household finances are on a steady footing with an emergency reserve before you start planning for education expenses. For young couples, the best strategies you can put in place are adequate insurance, making long-term tax efficient investments and up to date estate planning documents should something happen to you while they are young.
How can you save for your child’s education and what are the pros and cons of each option?
1. Your home loan
The discipline of structured repayment plan can be the best and most cost effective way to develop and maintain a strong savings habit. Focus with almost religious like zeal to reduce your home loan to near zero as soon as possible. Shop around for the best rates, keep an eye on fees and use a re-draw facility to fund ongoing education expenses. You can reduce your ‘bad’ (i.e. after tax) debt even faster in this low interest rate environment.
2. Investment portfolio
For those with a longer time frame, a diversified, low cost investment portfolio focused on Mutual Funds can be constructed reasonably easily. Invest the portfolio in the name of the parent who is on the lower tax bracket to optimise your tax, especially if one parent is not in paid employment.
3. Government Backed Children savings schemes
For those with a longer time frame (10 years plus) on a higher tax bracket, government backed children savings schemes may be an attractive option. For example the Sukanya Samriddhi Scheme launched recently the Government of India, to provide financial security for the girl child. They don’t impact your personal tax situation, you can contribute more to the scheme each year (within limits) and you may be able to access some (or all) of your funds before maturity should you need to for any purpose (i.e. not just for education expenses). Tax at withdrawl can sometimes be zero, or levied at the marginal tax rate (30%) or sometimes deducted by the scheme within the bond itself.
4. Education savings plans
While these sound like a purpose driven solution to this problem, you should always be mindful of the relatively high fees (in excess of 1% per annum) embedded into these products. The products are relatively inflexible for use of the funds once you place the investment. Should your circumstances change (such as your child not needing to fund tertiary or private secondary fees or you not being able to afford to continue contributions), you can request a surrender value for your funds but you may lose some of your earnings.
5. Your Provident Fund
Depending on your age, making additional personal or concessional contributions (such as salary sacrificing) to your provident fund can be an effective way to save in a tax effective environment. However, your money is then locked away and you can’t access it. The additional funds saved for your retirement can mean you can free up cash flow in later years to pay for education expenses.
When should you start saving?
The sooner the better. If your child is just a twinkle in your eye or if they have already started school, it’s never too late to start planning and saving and the best time is right now.