LONG TERM FINANCIAL PLANNING

LONG TERM FINANCIAL PLANNING FOR PARENTS

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If you have already started planning for your children, and have a long term vision of getting them admitted in the top universities of the world, then this segment is meant for you. It does not matter, if your children are two years, three years or even 15 years away from their college; this is the right time to plan for them. Smart and calculative investment in advance, ensures that you won’t have to compromise with the standard of education for your children.

The common question that strikes most of the parents-

How much do we have to save every month to ensure a bright future for our kids?

The money needed for enrolment is huge, and needs proper planning. The earlier you start the better will be your financial position in future.

“We don’t need to save – we will get a lot of financial aid”

It is absolutely understandable that a deserving student with good grades, and low family income with negligible assets, gets a nod from the financial admission officers. A student’s monetary needs, and his/her willingness to sacrifice can really impress the financial officers.

Then why do we need to save?

  • Considering, the economic condition and the stiff competition, there won’t be any colleges, that will provide financial aid after 5 to 10 years. In case, the long term financial planning is ignored – you might have to loan some amount in the future, and pay interest on the liability.
  • Saving and building up funds for future education, gives you the assurance against unprecedented financial conditions.

Cost of education in future and managing your money

PRIVATE UNIVERSITIES

The value of money depreciates with time leading to inflation. The increase in demand for education has led to a stiff increase in the tuition fees. In order to predict the future cost of education, we need to consider the financial predictions along with the current trend.

The average total cost, including the tuition, boarding and accommodation is around $40,000 per year. The financial experts (based on their study) feel the tuition fees will grow at the rate of 4 percent per annum. So, the average cost after 15 years (assuming that the cost grows at the rate of 4 percent/ annum) is expected to be around $76,000.

Note– This is just the average cost. If you consider the fees charged by top private schools, they have already crossed the $50,000 bar. Hence, you can expect them to reach the $70,000 mark in a span of 5 years.

PUBLIC UNIVERSITIES

State owned universities are considered to be more affordable centers of education. The average cost of education is around $18,000. However, the financial experts predict that their cost will continue to rise at a rate of 4-5% per annum. Therefore, enrolling your children into a public university after 15 years might cost you around $38,000.

What is the right time to save?

When you consider the steady rise in course fee with the increase in demand for education, you should not think about the appropriate time for saving money. Rather, you must start planning your investments as early as possible.

There is a famous saying “Money multiplies itself,” so you should not worry about the ever rising cost of education. Irrespective of how small the amount, we recommend you to keep adding money into your savings.

Irrespective of the nominal amount, the compounding of interest cannot be counted out. Hence, you can always consider adding up the money. Suppose, you save a minimum amount of $2,000 every year on debt funds. They are considered to be safe and yield an interest of around 7per/annum.

Let us take the help of an example

$2000 with a rate of 7 per will add up to $2,140, again if we do the calculation for the second year, the interest will be calculated on $2,140 – not $2,000, which will add up to $2,289. Similarly, the interest will keep on compounding, resulting in multiplying your money.

You can also choose the aggressive form of investments, like- the mutual funds, or stocks. However, these investments are subject to market risks, and your returns are not guaranteed.

How to manage your savings?

Most people find it hard to manage money, ultimately failing to save money for the future. Almost all banks have an option of automatic deduction, where a specified amount of money is deducted every month. This option makes savings mandatory, as the money gets deducted – without giving you a chance to spend it.

Who should be the owner of the money?

The money, which you save will be beneficial for your child’s long term education. Most parents have understood the need of a separate investment for their children, but the question lies – Who should be the owner of the money?

Suppose, you decide to put the money in the name of your child, then you are entitled to get some tax benefits. Let us take a look at the advantages-

  • You are allowed to gift your child $14,000 every year. The account is a custodial account where the parents administer the account on behalf of the beneficiary (their child). These types of accounts have a governing authority; like – the Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act. Similarly, a child can have two parents. So, the money, that can be transferred every year is $28,000.
  • The best part about this idea is, you transfer the money without paying a substantial amount of tax for the gift. The money, which is transferred is taxable by law, but the amount of tax charged is comparatively lower (as it is calculated by taking a minor into consideration).

Can I take the money back from my child’s account? When will my child be eligible to completely own the money?
No, you cannot take back the money for your personal use. However, you can use the money on behalf of your child, i.e. for paying educational fees, application fee, etc. Your child will be eligible to own the complete money at the age of 21 or 18, depending on the rules stated by different states.

Note– The money can only be used for the most important necessities like education, but you cannot use the money for an expensive holiday destination.

This method is mostly employed by citizens, who come under the high income groups, and the basic motto behind this is saving taxes.

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