As a parent your priority is yours
children’s future and being able to meet their dreams and aspirations. Today
providing a good education and establishing a professional career is expensive
and will further go up as time goes. Marriages are also no longer a simple
affair when it comes to finance. The event has become exponentially expensive
over the years. Now it’s more important for everyone to sit down and calculate
the money required to meet these important goals in the life of your child.
Still most of the parents do not plan for their children’s future and struggle
afterwards when time comes. If you want to provide good quality education to
your child or want to make his/her wedding a grand event, then you must act now
and start building up corpus for these goals. One has to start at earliest and
has to decide asset allocation depending on the age of child and the corpus
required.
One can easily calculate his/her child’s future needs
with the help of excel application without having to take help from
professional. Let us take a live example to understand how to calculate
retirement need. Mr. Nikolai aged 30 years has one daughter aged 4 years and
wants to plan for his daughter’s education and marriage fund when she turns 18
and 25 years respectively. He has done his home work and come to the conclusion
that he will require 10 lakhs for her higher education and 5 lakhs for marriage
in today’s costs. It is easy and advisable to finalise the expenses on the
basis of today’s cost as can be worked easily by various ways including asking
your friends and relatives who have recently incurred such expenses. Now Mr.
Nikolai wants to calculate this with the help of excel. So he opened excel application,
selected formulas then inserted functions as shown below. Let us see how he has
calculated his daughters need and understand the same in detail.
Easy to calculate in 2 steps with the help of excel.
Step I: Calculate future education expenses :
§
Rate
is the assumed inflation rate @ 8% p.a.
§
Nper
is the number of years left for education goal ( 18- 4) .
§
PV is
the present education expenses
§
FV
(answer) of Rs.29,37,194 is the future value of education expense at the age of
18 years of daughter.
StepII:
Calculate monthly investment required to accumulate education corpus.
§
Rate
of return is the assumed @ 15% p.a assuming 100% investment equity through MF
route. Equity is recommended as his education goal is a long term goal and far
away in future..
§
Nper
is the number of years for investment.
§
FV is
the corpus required for education as calculated in step I above.
§
PMT
(answer) is Rs. 5,200, is the monthly investment required from today for
accumulating the education corpus after 14 years.
§
Rate
is divided by 12 and Nper is multiplied by 12 to calculate monthly investment
required.
Nikolai has easily calculated education funds needed
in future and has also chalked out the plan of investment required to meet the
same. You too can do that. So what are you waiting for, open your excel and do
the exercise to compute the investments required to secure your education goal.
It is advisable to invest in equity schemes of mutual funds to build the
education fund if and when the goal is very far in future and very long term in
tenure. Do not invest in any so called
child plans sold by insurance copies for building education fund.
The exercise is not over yet. It is equally important
and advisable to review and rebalance your equity portfolio periodically. It is always advisable to hire a certified financial
planner for finalizing children’s future planning as planner will look into all
other goals and help you in balancing the various goals which are important in
your life.
This article is first appeared at myiris.com on 13th August'2012.
