Financial planning for a child should begin when you start thinking about having a baby
Mumbai: Have you planned for your finances to meet your child’s needs, including day-to-day expenses, education and marriage? If not, here is what you should do:
Secure your child
Ideally, start thinking about investing for your child’s needs when you start thinking about having a baby. The idea is to build a financial plan that acts as a ladder for your child’s needs. As your child is dependent on you, it is your responsibility to take care of him/her even if you are not around. Begin with an insurance policy. Opt for a term plan with a sum assured of at least 10-15 times your monthly income. This will act as security in case something unforeseen happens.
A traditional insurance plan will not work—the returns on endowment and money back plan ranges between 4% and 6% and don’t beat inflation. Once you have life insurance, take a closer look at the medical insurance cover. Go for a family floater health insurance policy and include your child in it.
Factor in all expenses
A child will have both short- and long-term expenses. Know that you will need money to take care of your child for the next 20-25 years. For long-term needs such as higher education and marriage, invest in equity through mutual funds. If you are comfortable with direct equities, go for it. For a long-term goal of say over 10 years, look for an asset allocation with at least 70-80% in equity, depending on your risk appetite. Besides equity, look to invest in risk-free lock-in products. For instance, opt for public provident fund. While you plan for the long-term goal, you will also be paying towards short-term needs such as school fees, coaching classes or other activities.
For short-term needs, look at investing in products such as debt funds or fixed deposits (FDs). If you are in the lower tax bracket, FD can work for you. You can use these funds for your child’s annual educational expenses.
Don’t ignore your goals
Your child’s financial needs are only one of the many financial goals you have in your life. Don’t ignore your financial needs. For instance, many parents don’t plan for their retirement and end up spending all the money on their child. If you fall short of money for your child, don’t dip into your retirement kitty. Make sure you always have sufficient money for your future needs while you work on your child’s plans.