My Child Was Earning Enough Right From the Birth to Support His Higher Education
It seems awkward but it is true. I didn’t have to worry about my child’s higher education which seems to be the worry of many of my neighbours since long. Yet I had some role to play which I shall be discussing in this article.
The basic principal in ensuring the same is the one which I had mentioned in my profile that “Most of time you just need little efforts for huge success, only the direction of efforts is what matters the most.” So my role in ensuring the success was to make sure that the direction of efforts was right.
Before I share, how it was done let us first know some words of wisdom from great minds.
- Albert Einstein famously said that “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
- The most successful investor of all times Warren Buffett attributes his success to “Compounding”. Starting from almost nothing in 1941, Warren Buffett’s wealth is estimated at USD 87.8 Bn at present (i.e. INR 62122 crores) as per Forbes.
While I am not promising this type of success which requires high degree of patience, persistence & ability to see what others can’t, what is am certain of is that these principles can help us solving most of our personal finance related problems.
So let us know what we had done to ensure that rising cost of higher education, which was a constant worry for most of my friends, did not bother us. Me and my wife started to ponder over it right from the birth of our child. During this time many of our relatives, friends visited our home and gave some money as “Shagun” to our child.
With basic principal of “Compounding” at back of our mind we decided that we shall be investing the amount in such a way that the it helps to support our child’s higher education years later.
While I shall be discussing the actual amounts (with some assumptions of course as the amounts shall vary for all of us) let me first discuss the reasons for success of diverting a specific cash flow (i.e. the amount my child was receiving from relatives, friends etc. in present case) for achievement of specific goal (i.e Child’s higher education in present case).
- While we all think of saving money for specific long term goals, most of the times, short term compulsions do not allow us for the same.
The disciplined approach (where we know that the specific amount shall be used for specific goal only), however, leads to ensure that the money is saved for the goal.
- With time on our side (for long term goals) we can take investment decisions & select investment products which give better returns and can also afford some extra risk.
So we started to put the amount in one “Index fund” & one “Bluechip fund”. The investment was made in the form of Systematic investment plan(SIP). It is well known fact that the equities beat the return of all other investment classes in long term. Hence it was an obvious choice.
We opened a savings account of our child and started putting money our child was receiving in it. The SIPs were initially started for a period of 2 years. We had selected the funds with some research over internet and analysing long term performance, reputation of fund house, fund manager etc. I was able to do the same as I have finance background and the same helped in saving “commission” paid to advisor. In case one is not well versed with “Mutual Funds”, the help of financial advisor may be sought.
Further the idea is to shift the corpus to conservative investment options like bank deposits and debt mutual funds at least two years before the goal.
Performance over the years:
The value of SIP investment of Rs. 2 lacs (assuming that the child received the same during initial 2 years) shall be Rs. 10.94 lacs after 15 years (assuming conservative return of 12% on investment). The amount shall be Rs. 16.27 lacs in case of return on investment @ 15%.
Remember that the corpus as above is the result of investment during 1st two years only while the investment may continue for longer term as well. A SIP of only Rs. 5000 for a period of 15 years & assuming a return of 12% shall result in corpus of Rs. 25.00 lacs (app) after 15 years (Invested amount Rs. 9.00 lacs & wealth gain Rs. 16.00 lacs).
Now see the power of compounding by extending the period by another 15 years (i.e a total of 30 years for our other long term investments i.e retirement etc) the same SIP of 5000 shall result in corpus of whopping Rs. 175 lacs (app.). The invested amount of Rs. 18.00 lacs & return of Rs. 157.00 lacs)
You can calculate the corpus in your case with the expected investment & period.
The approach as above has helped me ensuring achievement of various financial goals as it leads to persistence & discipline. The same may be modified according to one’s personal needs, goals, circumstances etc.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2019 Jass