Planning for your child's education? Here's help

I remember paying Rs 4,000 per annum when I did my engineering. However, when I took admission for MMS, and heard the fees was Rs 25,000 per annum, I could barely keep myself from fainting.

I mean Rs 16,000 for 4 years and Rs 50,000 for two years.

Then came another shocker when the juniors at my engineering college told me that the annual fees were hiked to Rs 32,000. Ouch!

By the time we moved into the third semester of MMS, our next batch had to cough up close to Rs 50,000 per annum for two years of management course.

Circa 2007. Just last week I visited a management institute whose director told me that the fees were Rs 1.25 lakh per annum.

Outrageous, isn't it? But real, too, at the same time.

Just imagine the cost of educating your child when s/ he grows up. If the thought scares you then, perhaps, this is the right time to start educating your child about how important money is and will become when s/ he grows up.

It is exactly for such situations that I have devised a financial plan. In this plan, I am taking a 12 per cent annual rise in cost of education for making financial plans, whereas in four years the cost has gone up five times, implying an annual growth of -- hold your breath -- close to 50 per cent.

If our kids have to shoulder the responsibility of financing their own education then shouldn't our schools start including financial education in our syllabus?

But as long as that does not happen, we have two options: Either to pass the legacy of funding their own education, so that even they end up being in as good (or as bad) a financial position as we are today, when they grow up, OR, educate them about money matters today, so that they are better off financially when they start their careers.

Imagine if they are taught the impact of the formula which they learn in Class VIII for a four-mark mathematics problem.

Consider this formula: A = P (1+r) ⁿ

Now let us apply this formula to a routine mathematical problem.

Yash, a standard VIII student got Rs 100 from his grandmother on his birthday. Instead of spending it, his parents taught him how to deposit the money in the bank. Yash deposited the Rs 100 in the bank for 10 years at an interest rate of 8 per cent. How much money will Yash have after 10 years, on his18th birthday?

If we substitute the values from the above question in the given formula, then we get,

P = Rs 100

n = 10 years

r = 8 per cent

Therefore, A = 100 * (1 + 8 per cent)¹⁰  = Rs 215.89.

In simple words, the money doubles up in a mere 10 years. Isn't that wonderful? Just replace the Rs 100 amount by Rs 10 lakhs and then perhaps you may find it wonderful.

Of course, the rate of return of 8 per cent taken here for calculations is a very conservative figure. Assume that this money is invested in safe instrument like say a fixed deposit in a government bank.

After all, this money is meant to provide for your child's education and you may not like to play around with it.

However, if you are financially savvy, this money can easily be invested in stocks, mutual funds, insurance schemes that may give you higher returns for a horizon of ten years.

Imagine what wonders could be achieved if your child starts investing Rs 5 every week, right from her/ his Class I (Age: 7 years), till the time s/ he appears for SSC. For the record, a weekly investment of Rs 5 @ 4 per cent per annum will give you Rs 2,944.92 against a total investment of Rs 2,400. These numbers might not sound very impressive, but the underlying concept is definitely very strong.

Financial planners emphasise about the importance of starting early -- if you start the day your child is born, s/ he will have an additional 21 years; tinker around slightly with the investment/ week and the rate of interest -- and you will see the difference!

Neither were we as children taught about how to save money nor are we as adults doing anything to teach the next generation about money. Isn't it time we rectified our mistakes?

For starters, let your child know what are the fees that you are paying for her/ his education, and also let her / him know what the fee was when you were a kid. Ask her/ him to do the math and calculate how much is the percent rise (keep a handy cam ready to shoot her expressions!).

Then ask her/ him to calculate the number of years before s/ he completes her/ his graduation.

Tell her/ him the fees, which you paid for graduation, and hence tell her/ him to calculate the fees, which s/ he will have to pay once s/ he approaches graduation, using the rate of growth, which s/ he has, calculated.

Now ask her/ him how much money should be invested every month and at what rate of interest so that the amount is reached -- and then tell her/ him to start doing it. All this exercise, after all, is meant to teach her/ him and make her/ him implement what s/ he is otherwise learning to score four marks in the exams.

The problem here is our ethos and thinking: Why should our children know how much fees we are paying? We love our children and we will do anything to fund their education -- how financially incorrect.

You were never told about inflation and the time value of money, so today you are under a Himalayan load of loans.

But do you want your children also to be in the same situation?

Nobody's questioning your love for your children, but what's the harm in teaching some money gyan, which will be useful to them in the long run.

While expenses continue to soar, competition is taking its toll. Not everybody makes it to the top of the pyramid, so forget high salaries, and hence a reduction in standard of living.

I wouldn't want my child to lead a life full of financial compromises. Would you?