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

Posted on 17 Mar 2021
Author: Sayan Sircar

Tags: Children ; Set Goals

10 mins read
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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 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.

📚 Topics covered:

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
Does this investment process really work?

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 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 as a step-up SIP

Age	Year	Goal Description	Cost today	Target goal value	Portfolio balance	SIP amount (yearly)
8	2024				0	5.0
9	2025				5	5.5
10	2026				11	6.1
11	2027				18	6.7
12	2028				27	7.4
13	2029				36	8.2
14	2030				47	9.1
15	2031				59	10.0
16	2032				74	11.0
17	2033	Entrance Exam	2	4	86	12.2
18	2034	UG Year 1	6	13	90	13.4
19	2035	UG Year 2	7	17	92	14.8
20	2036	UG Year 3	8	20	92	16.4
21	2037	UG Year 4	9	24	90	18.1
22	2038				114	20.0
23	2039				143
24	2040				152
25	2041	PG Year 1	10	33	127
26	2042	PG Year 2	12	42	90
27	2043				96
28	2044				102
29	2045				109
30	2046	Marriage	10	44	69
31	2047				74
32	2048				79
33	2049				84
34	2050	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.

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How to estimate the SIP value for children’s goals

Prerequisites before starting to invest for parent

An emergency fund with 6-12 months of expenses
A term insurance policy (unless you are retired with no income)
A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
No high-interest debt like credit card or personal loans

Also read
What should you do when your home loan interest rates go up?

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
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.

Does this investment process really work?

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Success Ratio for investing for 10 years

We have prepared a simulation using 26 years of market data in India to show the effectiveness of the goal-based investing process that shows how effective the process is for reaching close to the target. You will find more details here: What is the best way to invest for your child’s college education?

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