Goal-based investing: How to save for children's future
17 Mar 2021 - Contact Sayan Sircar
9 mins read
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.
Table of Contents
- 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)
- 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)|
|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|
|25||2039||PG Year 1||10||33||127|
|26||2040||PG Year 2||12||42||90|
In the example given above, the portfolio will look like this over time.
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:
Arthgyaan creates a system for reaching your financial goals by sharing simple, actionable advice backed by research and analysis.
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: 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.If you liked this article, consider subscribing to new posts by email by filling the form below.
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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)
1. Email me with any questions.2. Use our goal-based investing template to prepare a financial plan for yourself
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.
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