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We’ve shown a more mature cheek this time around when Norway did its we’ll-protect-your-kids number and accused the parents of a seven-year-old for trying to discipline him using physical punishment. The national hysteria is missing and the social media comment is more muted. At the risk of opening an unrelated debate, I have to say that our parenting style swings between overindulgence during babyhood and then moves to the other extreme once the kid begins to display a mind of its own. However, one concern that stays steady with most parents is the desire to save for the kid’s future, usually higher studies. This worry finds itself assuaged in high-cost child policies from insurance companies or gold or some fixed deposits earmarked for the child. The pressing need to move this money into a bucket labelled with the child’s name is not wrong. One of the reasons for locking that money in the name of the child is so that we can’t get to it when we need it. Un-targeted savings have a habit of ending up parked in front of the house in an upgrade that gives a high for about 10 days.

We all use mental accounts instinctively. My eighth-class-pass housekeeper does so with confidence. She manages the daily cash flow in a tiny purse she keeps handy. The daily cash needed for the various spends sits in the main cavity of the purse but the money for a book I am expecting the cash-on-demand service to deliver one day or the gas cylinder (yup, 900 bucks now) she keeps in a special zip pouch outside the main cavity. Woe betide anybody who uses up the earmarked money for the book or gas for any other purpose.

What she does instinctively has been given academic validation through the experiment-led research done by behavioural economists. There is enough research to show that earmarking spends, savings accounts and making smaller buckets of funds helps people manage their money, save more and invest better. In fact, professors Amar Cheema and Dilip Soman, in a 2009 paper titled The Effect of Bracketing on Spending show that once a smaller pot of money has been created out of a pool, there is a psychological cost of breaking it and people try not to do it. They also show in another paper titled Earmarking and Partitioning: Increasing Saving by Low-Income Households that printing pictures of kids on the envelopes earmarked for their future, tended to increase the effectiveness of even creating a smaller pot and showed increases in savings rates.

Most of us use earmarking to save for our kids’ future and some of it goes into products that are bought in the name of the kid himself. I’d like to sound a small note of caution here. Things may look a bit different when it suddenly zooms to giant size and has to hang its head to look at you. Friend I know has a son that wants to walk the streets of Europe playing his guitar when he turns 18. Sure, but do I want the result of many years of my savings and missed holidays to fund his beer in Rotterdam? Not sure about that one. At 18 or 20, knowing that a large pot of money is waiting to be harvested may not be the best piece of information to pass on to a kid. Two suggestions for kids’ future-targeting parents here. Certainly make the pots and label them with the kid’s name and picture and fund them diligently, but keep the money in your own name. That way you retain control of the money and the freshly-minted youth may not suddenly find himself holding a large pot of cash at 18 or 20. Two, don’t talk about what you are saving for his future. This builds expectations. Who knows what the future will bring, maybe a sudden catastrophe may get you to dip into the funds earmarked. But understand that retaining control of the money will put the burden of making and maintaining a registered will on you. Just remember the number of zeros in unclaimed deposits and with insurance companies to nudge the creation of that will.

End Note: A lot of financial planning discussion has been around investing with the traditional advice of asset allocation and risk profiling coming right out of text books. We may find it more efficient to think a bit about cash flow management and how to remove the obstacles to getting a full picture of the inflow and outflow of money. I loved the suggestion of blogger Chris Peterson who wishes his bank or some financial planning software would allow him not just an expense tracker but an ex-ante break up of the pool of money that sits in the savings account. Instead of looking at a lump sum, if that money could display broken into its earmarked uses (EMI, monthly spend, fees and so on) it becomes easier not just to deal with temptation but also manage the monthly cash flow.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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