One of the most memorable events in a person’s life is the birth of a child. In addition to being a milestone in life, it brings maturity and responsibility to the parents.
It also gives a serious boost to the financial life, and when it comes to child-future planning, its importance may even surpass that of retirement planning.
You must agree with me that the cost of raising children is usually much higher than the cost of buying a home, which many people think is the largest investment they can make.
Lately, the thought process of people has evolved and there is no distinction made between sons and daughters any more.
But despite their social progress, they still belong to the old school financially. This is why they are happy to buy, or rather get sold, insurance policies or bonds in their children’s names. They generally ask which policy is better for their Child future planning. And since they themselves asked for a policy, they get the insurance policy.
Nowadays, most new-age parents opt for child ULIPs instead of money-back policies. Is this a smart strategy? In short, no.
Emotional pitches and TV ads where Bunty’s fee is paid by the insurance plan or where Nikkie goes to NASA with the money accumulated by a child insurance plan all draw parents to these expensive products.
How do we solve this problem? The best course of action is to enter into a situation well prepared and in a planned manner, which will affect your financial well-being. It is rather important to start planning a child’s future and managing his or her finances long before they are born.
Child Future Planning – Getting Ready
Prepare a proper plan for the children’s future (please read this as planning, since people think a plan means a product). As soon as you get married, you can begin by:
- Buying Health Insurance with Maternity Benefit (If available) : There is a wide range of health insurance companies that offer maternity coverage as an additional feature. Expenses at hospitals and regular checkups are increasing day by day, and this policiy may ease the burden of expenses on deliveries, prenatal care and postnatal care. The employer-provided policy may contain this feature if you are employed. Do note that this feature should be in addition to the basic cover and not the only cover, as there are some maternity policies also available in the market. Please avoid those. Else better to manage it from your own cashflows.
- Start a Baby Fund: Regularly set aside an amount every month to handle the expenses associated with vaccinations and other medical check-ups. The amount must be increased if both parents work, and after the child is born, the wife plans to quit her job or remain on leave even after maternity leave ends.
- Start hunting for bargain deals on baby equipment. Buying the best car seat, stroller etc. for the child’s safety and comfort. Buying at full price is often a waste of money. Children outgrow many of these items very quickly. Begin your search for used goods with friends, acquaintances, and second-hand stores. Your baby will not know the difference. This will save you a lot of money.
- You must understand your finances completely. If you are burdened by debt, you should not take on this responsibility. As your expenses are going to increase soon, your EMI shouldn’t exceed 10% of your income at this stage. (Do a Lipid Profile Check of your finances)
Child Future Planning – Schooling and Routine expenses
In the next step, you will find that raising a child is not a child’s play.
While childcare may seem costly when your child is an infant, when your child is old enough to go to school, you will also have after-school programs, extracurricular activities, summer camps, etc.
It is advisable to make these expenses part of the current cash flow so that you do not overspend on other expenses. Now is the time to start saving for the children’s higher education and marriage.
Child future Planning – Long-term Goals
Taking a long-term view can sometimes cause you to be gender-biased.
It’s true that people’s thinking is changing, and normally they don’t differentiate between sons and daughters.
Still, there are some societal concerns that many people don’t want to ignore. A good example would be spending heavily on a daughter’s wedding. In the case of the son’s marriage, you may compromise, but for the daughter’s marriage, many parents will not cut corners. Therefore, this becomes a major goal in life.
The most common concerns of parents nowadays relate to helping the son settle down, presenting gifts to the daughters’ in-laws on special occasions and festivals, and sometimes taking care of the children (even after marriage).
Consequently, financial planning becomes increasingly important. People today are not only concerned about saving, but also about distribution. Savings are important, but tax-efficient planning is also important.
With inflation on the rise, you may eventually find yourself in a major mess if you delay the savings part.
The following are some tips designed to help you achieve the goals towards child future planning comfortably and in your own way, given some societal responsibilities that may affect the achievement of personal goals.
1.) Open Public Provident Fund (PPF) account: As soon as the child receives the first monetary gift, open a PPF account in their name. Ensure that whatever the child receives is only used to benefit him/her. Your pressure to save will ease as a result.
2.) Save with a proper asset allocation: Before you begin saving, you should determine the money value of your goals. Your goals should be inflation-adjusted. Invest only in instruments that provide tax-efficient returns, such as PPF and stock (directly or through mutual funds). (Read: How to determine Asset Allocation mix)
3) Buy gold: Not because gold prices will rise, but to make gold a part of your overall asset allocation. If you are one of those who have big dreams regarding the marriage of your daughter, you will need gold. Don’t go overboard, though.
4) Education: You can compromise on your savings for your son’s education as you can get an education loan whenever or if needed. However, you may want to save adequately for your daughter’s education because you may not want her to keep paying education loan EMIs even after marriage. (Read: factors to consider before going for an education Loan)
5.) Get Insured: Never buy insurance for your children in their name. Know what insurance is and why you need it. One purchases life insurance to manage the risks in their lives – death, health problems, accidents. Proper insurance planning is a must if you want to achieve your goals comfortably. It is also important to consider the sum assured and not the number of policies.
6.) Plan your retirement properly: If you want your children to be happy in their lives, you need to plan your retirement well. Every parent doesn’t want their daughter to remain concerned about them after they get married.
Even for the son, he may not be able to provide adequate support to the parents after getting into professional life or after marriage and if you become dependent on him during this time, then it creates unnecessary pressure in both of your minds.
7.) Give gifts through a trust: From the perspective of properly planning taxes and ensuring the safety of investments for the benefit of a married daughter, the father can create a private trust in her name. It facilitates the handling of a married daughter’s funds in a practical way. When a direct gift is made to a daughter, all the investments are in her name, she can take them with her to her father-in-law’s house while she’s married, and if there’s a financial crisis in her husband’s family, then she may be persuaded to part with the investments.
You may say that if the family requires it then what’s the harm, after all, she is also part of the family now. That’s completely fine. But still, it’s wise to be protected and make an informed decision without any coercion or pressure of any kind.
Furthermore, in this instance, it is possible that she may not be able to replenish it for quite some time. Hence, it is advisable to have a trust for the married daughter in order to save her funds and wealth from being sold away under the pressure of her husband or in-laws.
As long as investments for the benefit of a married daughter are held by trustees of a trust, it is not possible to ask the trustees to part with the investments to meet the family’s personal or business obligations.
However, this is necessary if you want to protect your daughters’ funds.
8) Trust for major son: Setting up a trust for the major son has its own practical advantages, especially while he is studying or not fully settled in life.
So the funds can be protected from being misappropriated if the son has them in his name only.
With no knowledge of financial management, son may not manage a bank account and investmenst that well and there is a risk of mismanagement and wasting of money.
By creating a private trust for his benefit, this abuse of funds can be prevented in this case, a bank account can be operated by the trustees, which could include the son’s parents.
You can transfer money to this trust if you want to save for your son’s business planning in the future.
Trust may look complicated to start with. Sometimes having a Joint account may also be enough.
Do proper estate planning: If you are truly concerned about your children’s future and want to minimize their hardships, then proper estate planning is essential.
Make sure that you have a valid and tax-efficient Will for the distribution of your wealth to your children. It is possible to create different tax files by allocating the assets not directly to the children, but to their Hindu Undivided Family (HUF), the grandson/granddaughter. You can also create a Trust through your Will.
This is the most important exercise which you should do at the moment your child is born. In case of death before the achievement of planned goals, you can specify in your Will how your insurance proceeds and other assets will be used/distributed.
The purpose of planning is to bring the future into the present in order to take action now. Someone once said, “A good plan today is better than a perfect plan tomorrow”.Be proactive and prepare your plan today.
It may not be appropriate for all to follow the steps mentioned above for child future planning, so you have to choose what works for you. If you have any other ideas on how to work better towards child future planning, please share them in the comments section below.