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Being a parent is tough. There are just too many things to manage all at once. You probably spend a lot of time worrying about your children’s health, homework, and their social skills. Then, there is the thought about their future. And, you don’t want the lack of funds to come in the way of realising their dreams.
It’s probably best to start saving for your child’s education as early as possible. However, to save effectively you need a plan and a reasonable estimate of eventual costs. Here’s how you can estimate the amount you’ll need to save for your child’s education:
For investments, time is the most crucial factor. Based on your child’s current age and the age at which they will pursue higher education, determine how long (time horizon) you have to save.
Understanding the current cost of education depends on where you live, the level of education you want your child to get, and the type of college you want them to go to. Also, determine whether your child will study locally or abroad for undergraduate, graduate and post-graduate degrees and whether it will be from a private institution.
According to the government, the costs of education are expected to rise faster than the costs for other services. Accounting for this higher cost as a result of inflation is essential.
Picking a reasonable rate of return on your investments is important. The rate you pick should be higher than the rate of inflation so you can preserve the purchasing power of your money. In an equity mutual fund, for example, you could expect a rate of return higher than your bank’s fixed deposit rates. Although the rate of return isn’t fixed, you can take an educated guess on the long term returns on a moderately risky mutual fund.
Finally, with the expected rate of return and the final financial goal in mind, you can calculate the exact amount you will have to save monthly. Use an online calculator to figure out how much you will need to save every month to meet your target.
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