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Every parent wishes to have a bright future for their child and try to put their best efforts so that their children succeed in life. But for bringing up a child it is important that the finances are in place and there are no last moment worries. It is, therefore, necessary to do the financial planning that would cover for the school education, higher college education, and even the marriage of the child.
The education costs you have to manage now for your child would not be the same after 10 or 20 years. There is around 10-12 percent yearly inflation on education. The 5 yearly MBBS course that costs around Rs 50 lakhs today would cost around 2.5 crores after 18 years. The same is the case with engineering or other post-graduate courses which would be much costlier after a decade or two. Getting stressed at the last moment would not result in any solution. Some parents wish to even contribute to their child’s marriage. The cost of marriage would definitely be much higher after 20 years.
Why talk about higher education? The education costs are not easy on salary even for small kids. The fee for LKG ranges from Rs. 25,000 to Rs. 50,000 in a tier -2 city. Remember this is only the fees we are talking about. What about the other requirements like the laptop for higher school? In the pandemic when children could not go to school, there was a requirement of mobiles even in villages to study online. These have become the basic necessities. There is also peer pressure among the children to have these necessities and the parents do not want to let them down and develop an inferiority complex.
So it becomes necessary to make investments taking into account the future cash flows and inflation and ensure that the funds are available around the important milestones in the child’s life so that there is no financial stress. Some of the things that can be done are-
1) Start investing at the earliest-
The sooner you start planning for the child’s education the better it is. People think that the child is small then why worry and plan about the future. We have already talked about education inflation and the studies are definitely going to be much costlier in the future.
Starting to invest as soon as the child is born is always good. You can invest in risky instruments also if it is for the long term. And there is always the time to change course when you find that some of the plans and investments are not working.
2) Make long term and short term goals for the child –
Before working out the amount that would be required for the child and investing the money you should be aware of what you wish to achieve and what would be goals. This would help in selecting the financial instrument for investment. The parent should know how much he can save and what is the present school and college cost of education. Taking the education inflation and the time horizon you would be able to decide the financial instruments where you need to make an investment.
The goals can be divided into short-term and long-term.
Short-term goals can include the expenses that would occur in the next 1- 2 years which would include the school fees of your child, bicycle, laptop, expenses related to picnic, participation in sports competitions, tuitions fees, etc.
Long-term goals would include planning for higher education like college education, graduation, post-graduation, studying abroad, or even the child’s marriage.
3) Investments to achieve the goals-
There are many financial options where a parent can invest for the child considering the goals set. Liquidity is the factor that is important while investing. Would the parent be able to get the money for immediate requirements for the short term?
The financial instruments where the parent can consider investing are the savings bank account, fixed deposits, post office schemes, and the debt mutual funds which give better returns than fixed deposits.
A small portion of the fund should be kept aside for any emergency and for short-term goals, fixed deposits and debt funds can be considered.
For reaching the long-term goals equity mutual funds can be considered. In the short term, there would always be volatility in the stock market but over the longer term, the equity mutual funds perform much better than fixed deposits and other debt instruments. It is always good to put money in equity mutual funds for the goals that are 10, 15, or even 20 years away, like the child’s marriage. The risk appetite of a person is important while considering the investment. When investing in equity SIP (systematic investment plan) or a lump sum amount can be considered. If there is an increase in the salary of the parent a SIP-top-up can be considered. When you have reached the goal amount withdraw the money in equity 1-2 years before the event so that a fall in the market would not affect the amount.
If a person is new to the stock market he can invest in children’s gift mutual funds that are specifically designed keeping in mind the requirements of the child. But there is a lock-in period of at least 5 years in these or until a child attains the age of majority. Some of the children’s gift mutual funds are-
- ICICI Prudential child care fund.
- HDFC children’s gift fund.
- TATA young citizen’s fund.
- Franklin children’s asset plan.
- UTI children’s career plan.
- Axis children’s gift fund.
All the investment options should be considered taking taxation into account. For the female child, there is the Sukanya Samriddhi Yojna where the returns are tax-free. The S.S.Y would mature after 21 years from the date of opening of the account.
4) Insurance is a must-
Every parent desires the best for their child, so insurance is a must for securing the future of the child. The parent is insured in the child plan but the beneficiary is the child. In the unfortunate event of the death disability or illness of the parent, there would be a strain on the financial resources of the family and the insurance would come to rescue.
On the death of the parent, the premiums need not be paid but the benefits of the plan would be there for the child. Most of the child insurance plans come with a built-in waiver of premium rider and the future premiums are paid by the company. This ensures that the child continues to march towards their goals.
In the money-back child’s plan, the child gets survival benefits at regular intervals. In the ULIPs the sum insured is received by the child as a lump sum while the future premiums are waived off.
5) Review the plans-
Every investment plan should be reviewed after some years because many changes would have occurred in between. There would be many factors that would have changed and it is important to review the plan after 4-5 years. Parents who review the plan would likely take into consideration any shortfall in the money that is likely to happen. This way they can adjust their savings and investments for their goals.
6) Teach children about financial responsibility-
A child stays with the parents most of the time and learns many things from them. Ensure that your child learns financial responsibility after a certain age. Give them monthly pocket money, and most importantly teach them how to manage money. Tell them about budgeting, how to save taxes, asset class, mutual fund investments, and interest rates. This would inculcate in them good financial habits as soon as they start earning.
These are the ways in which financial planning can be done for the child. Starting early would bring in the power of compounding and the money would grow at a faster rate in the long run. Setting and implementing the goals would let you know if you are on track to reach them or if some course correction is required in between.