Preparing for Your Children’s Future: Long-Term Savings Strategies

Planning for your children's future can feel like a big responsibility, but it's also one of the most rewarding investments ever made. From education to life milestones like higher studies, marriage, and even starting a career, there are numerous financial commitments you’ll want to prepare for. The key to achieving these goals is starting early, planning wisely, and choosing the right long-term savings strategies. By laying a solid financial foundation today, you can ensure your children have the support they need to achieve their dreams without financial stress.

Estimate the Cost of Education and Milestones

One of the first steps in planning for your children's future is estimating the potential costs they will incur. Education, in particular, has seen significant inflation over the years, and major life milestones like marriage or starting a business also come with financial commitments. Here's how you can approach these estimates:

1. Education Costs
The cost of education, especially for higher studies, is continually rising. Whether planning for schooling, undergraduate degrees, or international education, it’s crucial to have an approximate idea of how much you’ll need.

• Primary and Secondary Education: In India, private schooling costs can range from ₹1 lakh to ₹3 lakh annually, depending on the school and location.
• Higher Education: A four-year engineering degree can cost between ₹5 lakhs to ₹20 lakhs while pursuing an MBA or studying abroad could cost ₹25 lakhs to ₹50 lakhs or more.

Example: If your child is currently 5 years old, and you anticipate they will attend college at age 18, it’s important to consider the inflation rate. If a college degree currently costs ₹10 lakh, accounting for an average education inflation rate of 8%, this cost could double to approximately ₹20 lakh by the time your child is ready for higher education.

2. Other Milestones
Aside from education, other important milestones in your child’s life may include:

• Marriage: Depending on the type of wedding, costs in India can range anywhere from ₹5 lakh to ₹25 lakh or even higher, depending on the scale of the event.
• Starting a Career or Business: Your child may need financial support when starting a business or pursuing higher studies abroad. Planning for such milestones requires setting aside funds well in advance.

Example: If you anticipate your child’s marriage expenses at ₹10 lakhs in today’s market, and they are currently 10 years old, with inflation averaging 6%, you might need approximately ₹18-20 lakh by the time they are ready to get married.

3. Inflation's Impact on Future Costs
Inflation can significantly impact the future cost of education and major milestones. On average, education inflation in India hovers around 8-10% per year. This means that costs are likely to double every 7-8 years. It’s important to factor inflation into your savings calculations to avoid falling short when the time comes to pay for these expenses.

Example: If you're planning to save for a degree that currently costs ₹20 lakh, with 8% inflation, this could grow to ₹40 lakh by the time your child enters college in 10-12 years.

By estimating the future costs of education and key milestones, you’ll have a clearer picture of the amount you need to save. This allows you to choose the right savings and investment options that will help you meet these financial goals promptly.

Choosing the Right Savings Plan

Selecting the right savings plan is crucial when preparing for your child’s future. With several options available, it’s important to choose one that aligns with your financial goals, risk tolerance, and the time horizon for reaching those goals. Here are some of the most effective savings plans you can consider:

1. Public Provident Fund (PPF)
PPF is a long-term, government-backed savings scheme that offers guaranteed# returns and tax benefits*. It has a lock-in period of 15 years, making it a perfect option for building a solid corpus over time. Contributions to PPF are eligible for deductions under Section 80C, and the interest earned is tax-free*.

Why it's suitable:
PPF provides a stable, low-risk option with guaranteed^# returns, making it ideal for long-term goals like funding your child’s education or marriage.

Example: If you invest ₹1.5 lakh annually in PPF from the time your child is born, by the time they turn 18, you’ll have a considerable amount saved with tax-free* returns.

2. Sukanya Samriddhi Yojana (SSY)
Specifically designed for the girl child, SSY is another government-backed savings scheme that offers attractive interest rates and tax benefits*. It has a tenure of 21 years or until the girl child marries after the age of 18. Contributions to SSY qualify for deductions under Section 80C, and the interest earned is tax-free*.

Why it's suitable:
If you have a daughter, SSY offers higher interest rates compared to many other savings schemes, making it an excellent option for long-term savings.

Example: By starting early with a contribution of ₹1.5 lakh annually, you could accumulate over ₹60 lakh by the time your daughter is 21, all tax-free*.

3. Unit-Linked Insurance Plans (ULIPs)
ULIPs combine the benefits of insurance with investment, allowing you to invest in market-linked funds while also providing life insurance coverage. A portion of your premium goes towards life cover, while the rest is invested in equity, debt, or hybrid funds, based on your risk preference. ULIPs offer tax benefits* under Section 80C and tax-free* returns under Sec10(10D)** of income-tax Act,1961.

Why it's suitable:
For parents who want a mix of insurance and growth potential, ULIPs offer flexibility and the chance to earn higher returns based on market performance.

Example: Investing in a ULIP for 15 years, with a portion allocated to equity funds, could help you build a substantial corpus for your child’s future, along with the added security of life insurance.

4. Child Education Plans
These are specifically designed to help you save for your child’s education. Many child education plans offer a mix of insurance and investment options, ensuring that even in your absence, your child’s education needs are met. They also offer tax benefits* under Section 80C.

Why it's suitable: This plan ensures financial security for your child’s education and other milestones, even in unforeseen circumstances.

Example: A child education plan that matures when your child turns 18 could provide a lump sum payout to cover higher education costs.

5. Fixed Deposits (FDs):
Fixed deposits offer guaranteed^# returns and are a safe investment option for risk-averse parents. While they don’t offer as high returns as market-linked instruments, FDs are secure, and you know exactly how much you’ll have at the end of the tenure.

Why it's suitable:
FDs are ideal for parents who want a risk-free, fixed-income investment for short to medium-term goals like primary or secondary education.

Example: A 5-year FD at a 6% interest rate will provide predictable returns, ensuring you have funds available for immediate educational needs.

Investing Early for Compounding Benefits

One of the most powerful ways to grow your savings for your child’s future is by investing early and taking advantage of the power of compounding. When you invest early, your money has more time to grow, and the interest earned on your initial investment also starts generating returns. Here’s why starting early makes such a big difference:

1. What is Compounding?
Compounding is the process where the interest earned on your investment is reinvested, allowing your earnings to generate additional returns. Over time, this creates a snowball effect, significantly increasing the value of your investment. The earlier you start, the more your investment can grow.

Example: If you invest ₹1 lakh today at an interest rate of 8%, in 10 years, the compound interest will turn your investment into approximately ₹2.16 lakh. In 20 years, this amount will grow to ₹4.66 lakh, and in 30 years, it could reach ₹10.06 lakh.

2. The Power of Time
The key to compounding is time. Even small, regular investments can grow into a substantial corpus if given enough time to compound. Starting early, even if the contributions are small, allows you to take full advantage of this growth.

Example: Starting a ₹5,000 monthly investment in a child education plan when your child is born could accumulate more than ₹20 lakh by the time they are 18, assuming an average annual return of 8%.

3. How to Make Compounding Work for You

• Start early: The sooner you begin saving for your child, the more time your money has to grow through compounding.
• Contribute regularly: Set up automatic investments or savings to consistently contribute towards your goals.
• Choose growth-oriented plans: Consider ULIPs or mutual funds that offer the potential for higher returns, allowing compounding to have a greater impact.

Example: If you start a SIP (Systematic Investment Plan) in a mutual fund when your child is 5, by the time they turn 18, even small monthly contributions could grow into a significant amount due to the effects of compounding.

4. Reinvesting for Maximum Growth
Reinvest any returns you earn from your savings plan into the same plan to take full advantage of compounding. For example, reinvesting interest earned in a PPF or gains from ULIPs will help your savings grow at an even faster rate.

Example: If you receive ₹10,000 in interest from your PPF account, reinvesting that amount will allow it to generate returns along with your original contribution, increasing your overall corpus.

By starting early and choosing the right investment vehicles, you can maximise the power of compounding and give your child’s future the financial security it needs.

Conclusion

Preparing for your child’s future requires thoughtful planning, disciplined saving, and smart investment choices. By estimating the costs of education and other life milestones, choosing the right long-term savings plans, and investing early to harness the power of compounding, you can secure your child’s financial future confidently. The earlier you start, the more time you give your savings to grow, ensuring that when the time comes, you have the funds available to support your child’s dreams and aspirations. Long-term savings strategies like PPF, ULIPs, and child education plans are not just about setting money aside—they’re about building a future where your child can thrive without financial stress.