Goal-based investing: How to save for children's future
Save for children’s schooling, college education and marriage via goal-based investing.
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 their 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 of 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
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A typical example of 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 with 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 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)
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
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)
- Have personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
- 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
- An 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 the purpose (why), horizon (when) and cost of the goal today
- Assume at what rate the cost of the goal increases yearly
- Decide 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 detail 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.Worked out case studies for goal-based investing
-
Case study: how this double income recently married family can perform DIY goal-based investment planning
This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
-
Case Study: How should couples in their 40s with a new baby plan their financial future?
Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
-
Case study: how this double income single kid family can perform DIY goal-based investment planning
This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
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Topics you will like:
Asset Allocation (17) Basics (8) Behaviour (10) Budgeting (9) Calculator (13) Case Study (3) Children (9) Choosing Investments (28) FAQ (3) FIRE (10) Gold (6) Health Insurance (4) House Purchase (13) Insurance (12) International Investing (8) Life Stages (2) Loans (10) Market Movements (8) Mutual Funds (14) NPS (5) NRI (4) News (5) Pension (6) Portfolio Construction (36) Portfolio Review (22) Retirement (29) Review (7) Risk (6) Safe Withdrawal Rate (5) Set Goals (26) Step by step (8) Tax (16)Next steps:
1. Email me with any questions.
2. Use our goal-based investing template to prepare a financial plan for yourselfOR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.
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More posts...Disclaimer: Content on this site is for educational purpose only and is not financial advice. Nothing on this site should be construed as an offer or recommendation to buy/sell any financial product or service. Please consult a registered investment advisor before making any investments.
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