The moment your doctor says that you are expecting – is one of the best yearned and cherished moments of our life. You start planning for scores of things, like baby names, nursery themes, shopping for toys, clothes and the list goes on and on! All these things have to be done in less than nine months. This demanded that you get things done in a planned and organized manner. So the paper work has to begin fast. When we look at the real cost of raising a baby, we realized that we, parents need a solid and a practical financial plan. So, How To Plan Finances For Your Kid?
We need to start to look into ways to save, how to get insurance for the new born and a good financial plan that would help us save for his/her foreign studies and thereby ensuring him/her a bright future. To our utter amazement, we do not have substantial and adequate literature on financial planning. Be it choosing names, best baby shampoos available in the market or best organic bed sheets for your little one, you could find anything under the sun. But this topic on financial planning is hardly ventured into. So here I am with my perspective on financial planning for kids. This content is my personal opinion curated with reference to leading financial advisors in the field of financial planning. It is written with the sole intention of providing ideas and options to parents so that they could plan their finances before and after having a baby.
Common myths regarding financial planning are:
- Investments can wait until primary schooling starts
- Investments and insurance are the same
- Recurring deposits and Fixed Deposits are the best instruments, in all cases.
We often think about investments when the child enters primary/middle school, which is not a wise option at all. Because early investments means your money has more time to multiply and you benefit out of it. During our days, our parents believed in Recurring Deposits and Fixed Deposits to be the best option. But, they failed to see the hidden disadvantage – and that is, the interest rate being fixed, inflation rate is ever increasing. Thus, the returns are not very substantial.
Here it becomes necessary to diversify your surplus into Equity markets because it creates finances over a long period. We should understand that though the Equity Markets is highly volatile and very aggressive, it is very beneficial for the long term. As single digit interest rates will not be able to beat the long term inflation rate.
Is Gold a wise option in our Investment portfolio?
There is a common tradition across all sections of the society to invest in gold. Especially in families who are blessed with girls. Gold as an investment option is definitely a good option as the bullion rate is always on the increasing mode. The keynote is you need to diversify the investments into different instruments.
Emergency fund – how does it help you?
Emergencies can never be predicted, neither the time nor the quantum. A sensible step in this regard would be to create and maintain an Emergency Fund. It is in your best interest to set side atleast six months of your income. This fund should never be touched upon, until and unless there is an unavoidable contingency. The main rule to be followed is – Do not withdraw the investments even if you cannot add on to the fund.
Where and why to invest?
The mantra you need to follow is Diversify your portfolio. The options you could follow:
- Mutual funds. Why mutual funds? There are two main reasons – one is you don’t have to put lump sum amount at one go. And second, no need to track markets everyday.
- Long term Investment plans – Systematic Investment Plan, Mutual Funds, Equity Funds. These instruments are very helpful if you are looking at planning for your child’s further studies or marriage expenditure.
- Large cap funds, mid cap funds, multi cap funds and parent funds. Limit the investments to 8-10 funds, all put together.
The common mistake we make is that we invest in RD for a long period of time, like say 10 0r 15 years. In this instrument of investment, interest rates are fixed. We do not know what would be the situation of inflation after 10 years or so. Therefore, it is wise to invest in them for a small amount of time, thus, minimizing the risk.
How much to invest?
Is there a ratio of how much amount of income to be saved in the form of investments? Well, the answer is simple – An Increment of salary should match with increment in investment. That is, if your salary increases by 12% your savings increase by 12%.
If you have aspirations to send your kids abroad, then the first thing is you should find out what is the cost? Then, put in an inflation number and then see how much is it going to be after 15/16 years? You will get an amount, keeping that in mind and start saving. They key word is “Start Early”. One more important aspect is to make sure you have an account in the name of the minor. In case of emergency, you are sure your kids amount is kept aside. In no case, that amount should be utilized for other needs of your family.
Balance between mutual funds and insurance
There is a general misconception that Investments and Insurance are the same. It is very important for us parents to understand that once a baby is born, it is important to take insurance for his/her safety. Now, when it comes to Investments, it is purely your choice as to when and which Investment option you choose. But, it is strongly recommended that you start investing immediately after the baby is born.