Each year on November 14th, India celebrates Children’s Day, emphasising the significance of nurturing and safeguarding the future of its youth. Among the greatest gifts for children is the assurance of financial stability, particularly through a good education and a well-prepared plan that supports their needs until they attain financial independence. Securing a child’s future does not mean meeting immediate requirements; it also means establishing a solid financial foundation that supports their aspirations to achieve their goals in life.
Developing a financial plan for children is crucial, as it ensures their long-term welfare, particularly when educational expenses are on the rise. Children’s Day serves as a call to action, making parents realise to prioritise financial planning for their children. Here are key aspects that parents must consider.
1) Financial Literacy
Early exposure to money concepts helps children develop financial literacy. Understanding basic financial principles, such as saving, budgeting, and investing, sets a foundation for informed decision-making in adulthood. Teaching children about money fosters a sense of responsibility. When they are involved in budgeting their allowances or savings, they learn the consequences of their financial decisions. Whether saving for a toy, gadget, or education, goal-setting teaches patience, discipline, and the value of money. Don’t leave them alone to handle investments alone, sit with them and help them understand to enhance their financial knowledge.2) Savings Account
This is the first step into the world of financial journey. A savings account serves as an initial introduction to banking and the concept of saving money for your children’s future. It cultivates a habit of thrift and encourages responsible financial behaviour in kids. By having their own account, children learn the basics of managing funds, understanding transactions, and the importance of setting aside money for various purposes, such as education, future aspirations, or unforeseen needs. To initiate their investment journey, you can introduce your children to products like FDs (fixed deposits) and RDs (recurring deposits). This can help you cover initial expenses of medicine, primary education, clothes and other small expenses. Later you can introduce them to other schemes and mutual fund schemes. 3) Education Planning
Begin by estimating future educational expenses, considering factors like tuition fees, accommodation, and ancillary costs. Create a dedicated savings fund, such as a Fixed Deposit or Systematic Investment Plan (SIP), to ensure a disciplined approach to saving. Availing of specific savings schemes like the Public Provident Fund (PPF), offering 7.1% returns, and Sukanya Samriddhi Yojana (8%) can offer tax benefits and tailored features along with risk-free returns. Customise your savings based on your goals. You can opt for fixed-return products for less than 3-year investment goal and beyond this term, you may choose equity-linked schemes.
4) Higher Education
The cost of education is rising, especially higher education has become expensive especially when you are opting for technical courses for your children. Within India and abroad the cost may vary depending on the education institution, course, country and various other factors.
Start planning for your child’s higher education as early as possible. It gives you ample time to grow your wealth and helps you achieve your financial goals by investing small amounts of money regularly. Consider factors like the current cost of education, inflation rate, child’s age, admission age, expected returns, etc. This will help you arrive at a goal amount and since this is a long-term goal, you may allocate your money to equity-based investment options to earn higher returns.
Equity mutual fund deposits stand out as a top choice for children. This preference is attributed to two primary factors: the extended time horizon of 10-15 years and the available investment mode. Equity funds have consistently demonstrated a track record of delivering annual returns in the range of 12% to 15%. This can be helpful if you are planning higher education for your children or their marriage etc.
5) Understand the Power of Compounding
Every time you invest in any financial product for your children, you must understand the compounding of returns and how much they will generate to meet your children’s financial requirements.
For example, you invest Rs.10,000/month in an investment plan that offers you 12% returns for 10 years, making your principal investment Rs.12 lakh. After 10 years at the promised rate of return, you will have a corpus of Rs.23.23 lakh. Now, if you ran this investment for 20 years instead of 10 years, how much do you think you’d accumulate? If you guessed Rs.46.46 lakh, you’re wrong. Thanks to compounding, your 20-year investment would have generated Rs.99.91 lakh in returns. If you remain invested for another 5 years, your returns would double to Rs.1.82 crore, and in another 5 years, they would double to Rs.3.52 crore. That’s the magic of compounding!
This investment approach proves beneficial in managing education expenses, covering children’s weddings, and addressing other needs your children might have, while also catering to your own financial needs.
6) Diversification of Investment
Diversification enhances the potential for returns. Different asset classes have distinct risk and return profiles. By investing in a mix of mutual fund schemes, bonds and other instruments, parents can optimise their portfolio for a balance between growth and stability. This is particularly relevant for long-term goals like children’s education, where a diversified approach can capitalise on the compounding effect over time. Adjust your investments and diversify based on the age of your children.
7) Investing for Saving Tax
While saving for your children one important factor to keep in mind is tax saving. Tax planning and investment planning go hand in hand. Taxes eat into your investment returns and a good investment plan takes this into account. Also, not all investment returns are taxed the same way – some attract a higher tax than others, while some don’t attract tax at all. Your income level, too, determines the tax you pay, with a higher income attracting a higher tax. Tax deductions help lower your total taxable income, thus also reducing your tax liability. So, tax-saving investments take care of not only tax saving but also investing. You can choose government schemes like PPF or park your money in tax-saving mutual funds that come with a lock-in period to save taxes. There are various tax deductions available under the Income Tax laws.
8) Protecting Life and Health
Your entire efforts to make your investment grow may go in vain if you fail to provide health and life cover to your family. One emergency can wipe out the entire wealth and this is what we have already seen during the Covid-19 crisis. Life insurance is your family’s armour and will help them achieve their goals when you’re not around. That said, calculating the adequate amount of life insurance coverage can be challenging. Some factors you must keep in mind when assessing your insurance needs are your age, current income, family’s goals including your children’s education, income needs of your dependents, inflation, and your current assets and liabilities.
Like life insurance, health insurance, too, is essential for your family including children’s financial well-being. Many factors, such as your family’s medical history and past hospitalisation costs, medical inflation, and your city of residence, come into play when deciding the optimum amount of health insurance coverage. As a rule of thumb, you could begin with a health cover that is at least 50% or more of your annual income.
9) Emergency Funds
Emergency funds play a crucial role in safeguarding your family during times of crisis. These funds act as a financial cushion, providing a safety net that can be tapped into when unexpected circumstances arise.
Emergencies could include job loss, medical expenses, or any unforeseen financial strain. If a crisis occurs, having an emergency fund ensures that your child’s education is not compromised. These funds can cover tuition fees, educational materials, and other essential expenses, preventing disruptions in their academic journey. Without such a fund, families may be forced to compromise on the quality of education due to financial constraints. You must have at least 6-12 months of your monthly income in emergency funds, the size of these funds may also vary depending on your income and financial needs. Park this money in schemes that can be easily liquidated when you need funds.
It is recommended that you customise your children’s financial journey based on their age, your income, future financial needs, inflation, tax liabilities and emergencies. This will help you not only grow your investment but also protect your children and family from uncertainties.
(Adhil Shetty is CEO, Bankbazaar.com. Views are his own)
