During a stint at a financial planning company, a gentleman asked to be guided on goal planning. I asked him to list down all his goals and to prioritize them. To my surprise he placed buying a Honda Accord above his child’s education. I asked him if he was sure of what he was doing. He replied that it would be a matter of around Rs. 5 lakh for the kid’s education – a sum that he could easily manage in the next ten-twelve years (his son was around 5 at the time). So I asked him if he had accounted for inflation. To which query he replied that the difference would hardly be enough to make it that big a deal. I showed him some simple spreadsheet calculations and he was quickly surprised to know that Rs. 5 lakh at present, adjusted for inflation at 5%, would amount to Rs. 11 lakh 16 years. At an average inflation rate of 8%, the amount would grow to Rs. 17 lakh.

He reprioritized. Quickly.

Children’s education is becoming more and more challenging as the years go by. Hence it should be the most integral part of financial planning. It should be at the top of any list of goals while preparing a financial plan. The earlier you start, the better it will be. Luckily for the above-mentioned gentleman, he realized it very early, rejigged his priorities and started planning accordingly.

There are two main pillars when we talk about children’s education.

The first is life insurance cover for the earning parent (or parents).

The question arises as to why this insurance is so important. In the event of any mishap and the parent (s) passing away, it would become very difficult for the child to get the otherwise promised good education. The life insurance payout can then help to keep the child’s educational aims intact. In this regard, a pure protection term insurance policy would meet the needs.

The parent (s) could, in addition, opt for personal accident cover. As the name implies, the risk of death by accident is covered here. Again, this is to ensure that the child’s education does not suffer if any of the parents pass on before their time in unfortunate circumstances.

The second pillar is investment. That is, investing present available funds in such a manner that will allow parents to provide the best education for their children.

You should start investing early to take advantage of the power of compounding. To state an example, let’s assume the cost of an MBA for your kid after 15 years is going to be around Rs. 10 lakh. At the 8% rate of return provided by the Provident Fund (PF), you will need to start putting aside an amount of Rs. 37,000 every year to meet this goal. Investing that same sum in equities would fetch much better returns. This could be done directly, via mutual funds, or using the portfolio management services (PMS) route.

To corroborate this, let’s take the performance of the Bombay Stock Exchange (BSE) Sensex, a benchmark index of the Indian equity market. In 1992, it stood at 1957 at trading close, 01 January 1992. At trading close, 31 December 2007, the BSE Sensex stood at 20286 – a 936% jump. This is way better than anything a PF would give you.

Here are some interesting numbers - where you had to put away Rs. 37,000 every year at 8% in the PF to get your child that MBA, you would only have to invest Rs. 27,000 in equities every year at a 12% rate of return. And if the rate of return is raised to 17% per annum, your annual invested amount reduces to just Rs. 17,000.

The biggest dream of any parent is to see his/her children doing well in their lives. To achieve that goal, one needs to plan accordingly. The earlier one plans the better the plan will work out.