KARTIK JHAVERI gives tips on the ways in parents can plan funds for their child’s academic aspirations.
Everyone knows that funding for children is top priority. It is the most emotional decision of life and thus seeks priority over everything else. Mr. Akash Sharma also knew this.
We all know that education funding is going to be expensive and thus all should make provisions. We continue to have many instruments with fancy riders and options that continue to milk our greatest emotional need. Advertisements galore and as tax saving time approaches the decibel level rises. Because this is an emotional need we are most gullible here and tend to make financially unwise decisions albeit unknowingly.
Mr. Sharma also made a portfolio of children policies. Over time he realised that when the funds actually came in they were either swallowed by some home requirement or they were far too tiny to be seen or they came at the wrong time and thus got used elsewhere etc. Basically the purpose for which the funds were supposed to be used just did not happen. Something went wrong – but what?
I am going to share with you how most people’s education funding for their children is very short-sighed and their education funding plan is most unlikely to workout. But strangely this is never noticed openly. Even bizarre… somehow this gets managed. So what’s happening here…?
Most people buy life insurance policies to fund education. This is a big mistake. The ULIP versions of life insurance policies are however much better, provided there is maximum allocation to equities, while the traditional money-back variety etc is disastrous and causes irreparable damage. For the later the logic is simple. The rate of inflation for education funding is far higher than the rate of return provided by traditional policies. So they can never keep up the pace. Further you can buy a limited amount of these policies as you have limited income and because these policies are very expensive i.e. you pay much more than what you would pay for the same sum assured in a term or an endowment policy.
The reason for this high expense is that the insurance company is providing you a steady risk cover and at the same time also paying you intermittent cashflows for your child. This makes things expensive. But think for a moment – you child needs funds so why do you need life insurance? If you have adequate life insurance then why buy more life insurance to fund education? This is where the conflict is and as this is a very important emotional part of our life we tend to jump into this without batting an eyelid.
In later years we can’t figure what went wrong and why we don’t have enough. We place the blame on the education system and write off saying that things are just far too expensive. The next question is how we still manage to manage all the high cost of education. There are three sources of funds at this juncture viz., our existing savings and current income. Sometimes people also take loans themselves or the child has to take a loan. During the years we have saved money so we use that up. Over the years our income has risen substantially so we fund it from our current income and if needed we are also in a position to afford loans and that is exactly what most of us do.
The next thing that starts to go wrong in this process is that you have to start cutting down on other goals, retirement planning suffers; home purchase is delayed, holidays postponed indefinitely etc. None of these have an immediate impact i.e. here and now hence much of the fund is consumed for education and we get a false feeling that we have been able to manage children’s needs without any problem. The problem is that a new problem has begun to take shape and it will surface only after a few years.
What should you do is very hard to say. This is because at whichever stage of life you are i.e. your children are less than 5 years old or between 5-10 or 10-20 or 20+ for each family the situation is very different and specific. If there is inadequate funding then which goals to push back? By how much, which goals to replace and which assets to use when? If there is funding than is likely that it will be adequate? Will insurance policies help and if yes how much and when – if not what is the exit route? There is nothing standard about education funding. What is standard are some of the things that must be kept in mind while thinking about creating an education funding plan.
- Cash flows must readily available when needed – not by a pre-defined pattern
- Quantum of cash flows can be altered at will – what if more is suddenly required (this happens)
- Very high flexibility for choices of investment classes
- Geared to generate wealth and sometimes aggressively
- Appropriate projection of future costs
- Proportion of Funding possible i.e. education loan possibility
Would it not be nice to have a solid education funding strategy so that one never have to put hands into the pocket again for any funding for his/her child to the extent that even the child’s pocket money comes out of a strategy. Your plans are never disturbed.
(Kartik Jhaveri is a Certified Financial Planner and may be reached at email@example.com)