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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.

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?

  • 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


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Prerequisites before starting to invest for parent

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.

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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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This post titled Goal-based investing: How to save for children's future first appeared on 17 Mar 2021 at https://arthgyaan.com


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