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Goal-based investing: How to save for children's future

17 Mar 2021 - Contact Sayan Sircar

Tags:

Children ; Set Goals

9 mins read

Save for children’s schooling, college education and marriage via goal-based investing.

Save for children's schooling, college education and marriage via goal-based investing

Every parent considers children’s education to be their most important financial goal. After all, a degree from a prestigious institute like IIT, IIM, AIIMS, Oxbridge or MIT opens up unlimited opportunities. Similarly, a child may wish to pursue a career in arts, music, theatre, science or commerce from any global university or school of repute.

What are the typical goals for children?
A typical example for children’s goals
How to estimate the SIP value for children’s goals
Prerequisites before starting to invest for parent
Things to know: what do and what to avoid
How to save for goals

What are the typical goals for children?

School admission around age four
Miscellaneous significant expenses every few years (school trips etc.)
Undergraduate College at 17-18
Postgraduate College (2 years, timing unknown, > 23y)
Marriage
Down payment (a part of it) for their future house

A typical example for children’s goals

We consider an eight-year-old child whose parents are planning for

UG and PG college education
wedding costs
down payment when the child decides to buy a home in the future

These goals have been captured, and a goal based investing calculator is used to calculate the investment amounts.

A few observations:

the goal value will increase due to inflation over time
goals like a college education is not a single payment but a series of payments that begins with entrance examination costs
the further the goal, the higher is the target corpus
the investment amount will have to be increased with time

Age	Year	Goal Description	Cost today	Target goal value	Portfolio balance	SIP amount (yearly)
8	2022				0	5.0
9	2023				5	5.5
10	2024				11	6.1
11	2025				18	6.7
12	2026				27	7.4
13	2027				36	8.2
14	2028				47	9.1
15	2029				59	10.0
16	2030				74	11.0
17	2031	Entrance Exam	2	4	86	12.2
18	2032	UG Year 1	6	13	90	13.4
19	2033	UG Year 2	7	17	92	14.8
20	2034	UG Year 3	8	20	92	16.4
21	2035	UG Year 4	9	24	90	18.1
22	2036				114	20.0
23	2037				143
24	2038				152
25	2039	PG Year 1	10	33	127
26	2040	PG Year 2	12	42	90
27	2041				96
28	2042				102
29	2043				109
30	2044	Marriage	10	44	69
31	2045				74
32	2046				79
33	2047				84
34	2048	House	15	84	0

In the example given above, the portfolio will look like this over time.

(click to open in a new tab)

Calculation of SIP amount for multiple goals

This post on estimating the cost of the degree shows how to get to the starting point of setting the goal.

How to estimate the SIP value for children’s goals

Our new Goal-based investing tool will help you to create and manage all of your goals in one place. Click the image below to get access:

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Prerequisites before starting to invest for parent

Have an emergency fund for at least 6-12 months of expenses
Have a sinking fund for periodic, known expenses
Have term-insurance coverage for all earning members of the family
Have a large health insurance policy (separate from employer)
Pay off high-interest debt like credit card or personal loans

Things to know: what do and what to avoid

Avoid insurance plans for children: these have names with the words child, scholar, kid etc. in them: these are traps for parents to waste their money

CLICK TO TWEET

Avoid insurance plans: these have names with the words child, scholar, kid etc. in them: these are traps for parents to waste their money
Gold can be bought for marriage but not too much
Sukanya Samriddhi Yojana (for girl child) has 21-year lock-in and may be more appropriate for parent’s retirement than for UG education
Additional 150,000/year can be saved in a PPF account in the child’s name for 15 years

Read more on operational aspects of investing here: Should you invest in the name of your children?

How to save for goals

We follow the standard framework replicated here:

Decide purpose (why), horizon (when) and cost of goal today
Assume at what rate the cost of the goal increases yearly
Decide on how much risk you want to take for this goal
Formulate an asset allocation suitable as per assumptions in the previous steps
Start a SIP in funds as per asset allocation and decide on a review frequency
On every review, see if you are on-track and manage risk via rebalancing your portfolio.

This post deals in more details regarding where to invest for children’s goals.

You can perform these calculations using the comprehensive Excel planner. In addition, please refer to this post regarding how to set such goals. This post deals with how to prioritize our retirement over goals for children and is a must-read if you think that you cannot manage every goal at present.

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Topics you will like:

Asset Allocation (18) Basics (5) Behaviour (10) Budgeting (9) Calculator (10) Children (6) Choosing Investments (24) FAQ (2) FIRE (8) Gold (6) House Purchase (10) Insurance (6) Life Stages (2) Loans (10) NPS (3) NRI (3) News (5) Portfolio Construction (27) Portfolio Review (17) Retirement (20) Review (7) Risk (6) Set Goals (24) Step by step (3) Tax (10)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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