Opinion | Know the cost of raising a child to plan in advance

It may be emotionally jarring to compare the cost of raising a child with the joy of having one to raise, but it is prudent to know and plan such costs. As per rough estimates, it costs between ₹1.5 crore and ₹2 crore to raise a child—from the day it is conceived to the time it takes off on its own. Given the cost of raising a child in current times, the old saying, “bacche do hi acche” (only two kids are good), sounds financially sensible. The saying has also been adopted by the government. A proposed amendment to the Constitution (Amendment) Bill, 2020, which was introduced in Rajya Sabha on 7 February, 2020, seeks to encourage two-child policy to keep a check on the population.

Here are some of the expenses that come up at different life stages of a child. The expenses are average estimates in view of the current trends.

Expenses at various life stages

Until pre-school: In the first year after the child is born, about ₹1 lakh is spent towards medicines, vaccination and baby care products, which are quite expensive in urban and semi-urban locations. Once the child completes two years of age comes the first major expense towards schooling in the form of a play group or creche. This expense could be in the range of ₹50,000 to ₹1 lakh depending upon the facilities provided. The expenses on toys and clothes is significant in the early part of a child’s life since it tends to outgrow them.

School expenses: As much as 65% of the parents spend at least half of their yearly income on their child’s education and extra co-curricular activities. Every parent would want the best of education for their child which sometimes make them struggle to make ends meet due to rising school fees. A decent school charges an annual fee of ₹50,000 to ₹2 lakh. The 12 years from Classes I to XII would entail an outflow of ₹11 lakh to ₹43 lakh assuming 10% annual education inflation. This cost is apart from any tuition or co-curricular activities that the child will be enrolled for.

Higher studies: The biggest expense that worries Indian parents is the cost of higher education, which has been going up consistently. If the average cost of pursuing engineering is ₹10 lakh today, the same would cost about ₹40 lakh to ₹50 lakh in about 15 years. Similarly, if a medical degree costs ₹25 lakh today, it is safe to assume that it will cost above ₹1 crore in 15 years. Although, parents can opt for education loans to fund higher studies, the interest cost remains high, even after the tax exemptions.

Discretionary expenses: Apart from education, a family might end up spending on upgrading their house to accommodate the privacy requirements of grown-up children. Entertainment costs have also risen significantly, especially in urban areas. There are birthday parties to throw, birthday gifts to be bought, school cultural events, gadgets, hobbies to be managed and so on.

Plan ahead

In view of the above outflows, financial planning is imperative so that parents don’t end up spending more than what is necessary on their children and are left unprepared for their own retirement. Then there are safety nets to be put in place such as buying adequate insurance and creating an emergency corpus.

Parents especially need to plan for the higher education of children. For that purpose, they can set aside about ₹13,000 per month. Assuming an average return of 10% over the next 20 years, you will be able to accumulate approximately ₹1 crore. To ensure that the higher education goal does not get impacted due to the untimely demise of the earning parent, go for a term insurance cover of approximately ₹38 lakh. If indeed such an untoward incident were to happen, the nominee can invest this insurance claim of ₹38 lakh in a fixed deposit—earning an average post-tax return of 5% per year—to pay for the ₹1 crore cash requirement for higher education in 20 years.

To sum up, prudent planning and sustained discipline in investments will ensure a family is better prepared to sail through all the expenses in a stress-free manner.

Vinit Iyer is co-founder, Wealth Creators Financial Advisors