Children's education and marriage funds
TLDR: How to save up for children’s education and marriage and how much do you need?
When it comes to goal planning especially for FIRE retirees, one of the goals that they comes up is child’s education and marriage other than the retirement goal itself. So how do you achieve these goals over and above your retirement. I am going to use child’s education as an example here but it can be extrapolated to any other goal that you might have like wedding expenses as well.
Goal definition
I have talked about having SMART goals in my earlier post as to why it is important to have clear definition of what the goal is. Some questions that you can ask yourself when it comes to goal planning for your child’s education
What is the time horizon I have to save for this goal?
What parts of the education am I planning to fund - does it include school, college, graduation, post grad, doctorate etc?
Where is my child expected to study? Is he or she looking to study in India, in Singapore, In US or UK? Costs vary significantly based on where they study and what they study.
Is the child expected to look for a part time job to supplement his/her expenses?
Am I going to fund not just tuition or full board for the entire duration of school?
What is the cost of education now and what is the inflation that you have seen over the last 5 or 10 years? Is the inflation expected to be the same or will it increase in the future?
Power of compounding
If your child is young, you have time as your ally and the power of compounding will make it easier to achieve your goal.
Let us use an example of Singapore of a 10 year old child who wants to do a 3 year degree program here. The typical costs of education here is around 30K SGD per year currently. I would expect this cost to reach 50K based on education inflation by the time the child reaches the age of 18. So for a 3 year degree the cost is 150K just for tuition but if you include board and other costs it could be closer to 250K SGD.
That seems like a lot of money.
But assume you start today and you have 8 years to accumulate this amount - just need to start investing
1400$ every month
escalating at 10% per year
at a very reasonable return of 8%,
you will net more than 258K SGD.
If your child is only 3 years old, you have 15 years to achieve this goal. Your monthly investment requirements are even smaller.
500$ every month
escalating at 10% per year
at a very reasonable return of 8%,
you will net more than 319K SGD. (increased amount because of 5 more years of inflation)
The power of compounding helps your achieve this goal quite comfortably. The earlier you start the easier it is.
What products to invest in
When it comes to our children, we are happy to stretch the budget and get them things even when it is not really required. As some of us live through them and want them to have the best things in life. This is clearly being misused and abused the investment industry with plans which have “child” “education” in their names to attract parents.
Do not fall for these plans.
Most of these plans have mediocre returns and have much higher fees.
If your goal is more than 7 years away then, the easiest way to achieve these goals in the stock market is to DCA / SIP into well diversified low cost index funds. My recommendations for the Indian market are covered here. I would encourage the use of globally diversified funds if possible to reduce country risk. If you are unable to do that investing in the top 250 companies in India by market cap.
Conclusion
The difficult thing when it comes to children's education should be
“which university to go to?”
not your ability to support your child because of lack of finances. Plan towards the goals with a clear target in mind. You can start small and achieve them by using the power of compounding to your advantage.
Good luck and happy investing.
