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How to Save Money for your Children’s Higher Education?

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The expense of children’s education has risen as a result of lifestyle inflation: “As your quality of living grows, it influences where you send your children for higher education.” 

Children who have grown up in affluent households are less likely to attend government universities with poor facilities.

The primary question that Indian parents are concerned about is whether they will be able to afford their children’s higher education or not? They can do it if they prepare ahead of time and take the necessary procedures.

This week’s cover article examines the obstacles that parents experience while saving for their children’s education and how they may be overcome.

Be an early bird

One apparent option is to begin saving as soon as possible. Not only will the individual be able to accumulate a greater sum, but the money will also benefit from compounding. 

A corpus of Rs 1 crore may be overwhelming, but it is possible to save this money over 18 years with a SIP of Rs 9,000 in an equity fund that pays a 15% return. 

A delayed start not only results in a lower corpus but also puts other financial ambitions in jeopardy(uncertainty). 

You’re more likely to fall short of the minimum amount if you start saving for your child’s school in your 40s. To bridge the gap, many parents turn to their retirement funds, but this can be a dangerous choice. 

Choose the right option

An early start is insufficient. Parents must also spend wisely in order to obtain the best results. 

In the last ten years, equity mutual funds, for example, have provided average annualized returns of 16.5%. Equity investments are not for everyone, even if they have the potential to provide substantial returns. 

The DSP Blackrock Investor Pulse poll released this year found that, despite their high proclivity to save and invest, Indians still want protection. 

Almost half of the 1,500 people who took part in the survey indicated they wanted guaranteed returns on their investments. If you have 15 to 18 years until your child begins college, however, equity funds should be your first choice.

The volatility of returns is levelled down over such a lengthy period. If you have a high-risk appetite, you can allocate as much as 75% of your portfolio to stocks.

The equilibrium safer choices such as the PPF, bank savings, and tax-free bonds can account for 25-30% of the portfolio. Bank deposits are inefficient in terms of taxation; therefore if you’re in the 30% tax rate, invest in income funds. 

Instead of being taxed on interest every year, you will only be charged when you remove the money.

In the short run, it’s best to play it safe

If your time horizon is smaller than five years, you’ll have to rely on fixed income instruments, which are likely to provide a lower rate of return. 

These, on the other hand, provide assured profits and capital security. These issues become quite relevant in the short run.

Don’t invest at random, even though fixed-income assets are quite secure. When investing in debt securities, be sure that liquidity is not an issue. 

For example, the PPF is a fantastic investment, but you should avoid it if you need money in three to four years. While the rewards on tax-free bonds may appear appealing, they come with a risk known as reinvestment risk. 

They will pay out interest every year, which may have to be reinvested at lower rates if interest rates decline. As a result, go with the cumulative payment option.

Approaching the goal

When it comes to long-term investments, the investing process is never static. For people with a 12-15 year investing horizon, we recommend equity funds

However, five years before your target date, you should begin moving money from stocks to debt for protection. Begin transferring money from your stock fund to a short-term debt fund in a methodical manner (average maturity of 1-3 years). 

Keep in mind that your child’s admission date to college has been set in stone. You cannot allow a stock market slump to jeopardize your child’s college education.

Use the “2K rule” to your advantage

Fidelity Investments created the 2K rule as a guideline for college financial planning. To calculate a college savings goal, double your child’s age by $2,000, according to the regulation. 

By your child is five years old, your college savings should be $10,000; if they are fifteen, you should have $30,000 saved. 

Your $36,000 education fund can help cut college expenditures in half by the time they turn 18, and you can make up the gap with scholarships and student loans.

Use a 529 plan or education IRA

A 529 plan is a tax-advantaged savings account offered by state agencies, colleges and other educational organizations. 

A 529 plan offers various tax benefits based on your state and situation, and the money you put into one is not taxed by the federal government if you use it for approved educational purposes like tuition. 

Education savings accounts, which act similarly to Roth IRAs and save after-tax monies, are the most frequent kind of 529 plans. A comparable program, an educational savings account (ESA), allow you to pick where you invest. 

An education IRA works similarly, allowing parents and guardians to lay money away for educational reasons that may be taken tax-free. Prepaid tuition plans are also available, which are normally set up for public universities but can be converted into cash for private colleges.

Starting college early with AP classes is a great way to get a head start

One way to save money on college is to drop some necessary subjects. Your youngster can pursue college-level courses in high school through advanced placement (AP) classes. 

If a student obtains a high score on the AP exam after the semester, they may be able to “test out” of and receive credit for specific college subjects, such as English or history.

Encourage your children to put money down for their future studies

Instil in your children the value of saving and urge them to start their own college savings account. This will help them understand the importance of a college degree as well as give them a sense of investment in the process. 

To encourage children to save, in addition to having them keep their own college savings account, try matching their contributions with your own.

As part of your college financial planning, consider the many savings vehicles available and select one or more that match your needs. 

Aside from savings and money market accounts, you might consider a certificate of deposit (CD), which pays higher interest in exchange for a commitment not to access the funds for a specified period, ranging from six months to ten years. 

Investing, a 529 plan, an ESA, and other sorts of savings strategies should all be considered. There’s a good chance you’ll want to utilize more than one.

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