My young friend Arun is expecting his first child in March. 2013 and he has already planned many things. Right from name of the child, brand of the baby soap and oil, toys, health drink everything is planned. His wife has gone one step further and registered herself in www.indiaparenting.com to get more tips to handle child birth and the related issues.
Fine, but what about financial planning for the new kid?
Planning the future of children is incomplete without financial planning for them during each and every stage of their life.
Let us have a quick look at different stages where financial planning is needed for growth, development, better career and future for children.
Expecting a baby
Normally, at this stage you have to spend extra money on meeting the pregnancy related expenses. This includes routine doctor visits, laboratory tests, sonography, scanning, medicines etc. You have to plan for the delivery related expenses also. If it is a cesarean section, the expense will be on the higher side. Most of the health insurance policies will not cover the delivery related expenses or there will be lot of restrictions. If your wife is planning for leave for some time after delivery, that also can affect your monthly budget. All this has to be planned in advance.
On his/her arrival
This is going to be one of the most memorable periods in your life! As responsible parents, you want to give the best of everything to your child. Your medical expenses will increase because of the frequent doctor visits for vaccinations etc. Household expenses also will increase considerably because your child requires everything special, from special toilet soaps, bath oil, talcum powder etc. MNCs are competing each other to launch health drinks for each life stage of your child! There will be a decent addition to your household budget, which has to be planned in advance.
Expenses related to the above 2 stages has to be planned in advance by way of a contingency fund. You can start investing in recurring Deposits of banks atleast 2 years before the child birth, to accumulate the required amount without much difficulty. Depending on your place of living, the type of hospital you are opting, the amount will vary. But these can be planned in advance.
Day care/ Crèche expenses
If your wife wants to work after 1 year or so, you require the help of a day care centre/crèche to take care of the child during daytime. Now you have day care centres at huge costs, which offer extra care and comfort to the child. Are you staying with your mother or in – law? If not, provide some extra money for a baby sitter also.
Pre – Schools
Now, your child is entering the next phase in life. At this stage, child is getting ready to start his studies. You want to ensure that the school environment is safe and hygienic. To provide all these facilities to your child, you have to spend a good amount of money on the pre-schools. We are having pre- schools in the corporate sector, with huge charges attached. Better, plan for it in advance.
Expenses for the above 2 stages can be planned in advance by investing small amount every month in a debt mutual fund. You can start a SIP in a debt fund soon after marriage and this will take care of these expenses.
At the school
We believe in giving the best possible education to our children. However, taking admission in good schools is very difficult. Along with the payment of donations, you have to spend on school fees, tuition fees, books, extra-curricular activities etc.
You have to plan finances properly for enrolling your kid in that best school. This stage requires careful planning because the expenses will increase year after year. Education inflation is more than 10% for the last many years and is not showing any signs of coming down. You can save through debt instruments like RD, Debt mutual funds and can meet the expenses partially from your increase in income year after year.
Getting educated in a reputed institution will ensure a decent career for your child. Irrespective of the stream, he or she should be send to the reputed institutes to ensure a bright career.
This stage is the nightmare for parents because of the daily increasing cost of higher education. Even if your child gets admission through merit, the other expenses are on the very higher side. I am not talking about the capitation fee for admission to post graduate courses in medicine! These are beyond the imagination of a middle class person.
How to plan for this? The best way is to start early. If you start saving for this from the birth of your child, you can reach these without much difficulty. Otherwise, you have to think of an education loan.
Arun want to provide 20 Lakhs in today’s cost for his future child’s higher education. He wants this money to be ready when the child is 18 years. Let us see how he can plan for it.
Assuming an inflation of 8%, the value of 20 Lakhs after 18 years will be around 80Lakhs. This is one option for Arun.
He can start a Public Provident fund account and start investing 2000 per month in that every month. He has to increase the contribution by 10% every year. So, from second year, the monthly investments will be 2200/- and so on. At the end of 15 year, he will have around 12 Lakhs assuming 7% returns (though the current rate is 8.8%). If he re invest this 12 lakhs for another 3 years at 8%, he will get 15 Lakhs when the child is aged 18.
If he invest 9000/- per month in good mutual funds through SIPs, he can accumulate around 65 Lakhs in 18 years assuming an annual return of 12%. Another option is to start SIP of 5000/- now and increase it by 10% every year for the next 18 years.
The above 2 investments will contribute 80 Lakhs when the child is aged 18. Monitoring of the mutual fund investments on a regular basis and changing the funds if necessary are important for reaching the goal.
Arun has to review his Life insurance needs with the new goals in mind and has to go for extra cover. He has to add his child in his family floater health policy, immediately after child birth.
Arun and wife are now all set to start the PPF and SIPs and complete the process of child planning 2 months ahead of the child birth.
I wish them good luck. The child is really lucky to have such parents.