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Your children and their financial needs

Did you know that the average middle class Indian family could need up to Rs 1.5 crores to attend to the needs of a single child, from the time the child is born to the time the child graduates from college. The amount will obviously be higher if you have two or more children.

Whether you are a parent already or are planning to have kids, providing for their financial security is one of your most important responsibilities. This will remain a priority for you for at least the first 20 years of your children's lives. So, how best can you fulfill all their financial needs without having to stress about it. Here we share with you some good habits and insights, and also suggest some strategies that you will find easy to implement.

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What are the expenses that I need to provide for my child?

Right from when your child is born, the expenses never stop. Apart from the basic expenses such as living costs (boarding, lodging, food, clothing and primary education), there are discretionary lifestyle related costs (hobbies, private tutors, sports lessons, coaching classes for entrance tests, mobile phones, internet connectivity and computer costs etc.). As children grow old, their need for pocket money also grows.

Then, once they hit college-going age, there are the obvious costs of tuition. Current rates of inflation in the education space are anywhere between 5% to 20% per annum. That could mean that for a child born today, the cost of college education could be at least 200% higher by the time they hit 18 years of age.

Thereafter, there could be costs associated with post-graduate education like an MBA or higher studies for specialization in a foreign university.

Finally, there could be marriage expenses, by the time your child is ready to start their own family.

All told, given the 20-year cycle of expenses, and the rising costs of meeting these expenses, it is estimated that it could take up Rs 1.5 crores to meet all these costs towards bringing up a child.

When should I start planning for my child's financial future?

As quickly as possible! Raising a family and children is expensive. So you want to start early. Many want to be parents start even before their child is born. Others start at their birth.

The reason to start early is that you will have a long time ahead of you and your child to accumulate returns on your savings and investments. So, your money can work uninterrupted over a longer duration to grow into a large corpus by the time your child is ready for major expenses such as college or marriage. By starting early, you can take advantage of compounding of capital. Even if you start with a small sum of money, invest early and regularly for your child.

Please also keep in mind that many of expenses related to raising a child will be contemporaneous with your other major financial goals such as buying a car, buying a house, planning for your retirement and taking care of your aging parents. By starting early, you can avoid being under prepared and being in a crunch situation when all your financial goals need to be met simultaneously.

What investment criteria should I use to invest for my children?

Two things stand out:

1. Think long-term: You need to think in terms of decades, because the big-ticket financial goals of college and marriage are likely at least a decade away for a young child. So, think of putting money for the long-term.
   

   The best instrument for this is investing in equities, if you are skilled enough to pick stocks, or preferably invest in equity mutual funds where an expert fund manager can invest on your behalf.



2. Capital appreciation: You should be willing to take on a little bit more risk to earn a higher reward, again because your child's financial goals are at least a decade away. In this situation, you must target capital appreciation that is higher than the rate of inflation. Assuming long-term inflation in a country like India is going to average about 5%, your after tax returns must return more than amount, otherwise you will be unable to adequately fulfill your child's funding goals.
   

   Avoid opening an FD for a new born child, or buying any kind of fixed income instrument like a debt fund or government bonds. Invest in instruments that will offer you long-term capital appreciation.

Do I need to get insurance for my child?

To start with, lets distinguish between the two types of insurance you might wish to consider - health and life insurance.

As far as health insurance is concerned, make sure your child is covered under your private insurance policy under a family floater plan, or is at least covered under your employer provided health insurance plan.

As far as life insurance is concerned, there is no need for you to get life insurance on a newborn baby's life, because there is no one financially dependent on this infant. Also, there will be restrictions, like deferment, on your ability to get life insurance for an infant.

What is more important is that you as a parent must have a life insurance cover on your own life such that if something happens to you, your child's financial needs are adequately taken care of.

You can do this either by getting a traditional insurance plan, or a unit linked insurance child plan. In either case, you must again think long-term and have adequate insurance cover until your child is financially independent of you, so the plan must cover at least 10-15 years. Some plans come with a feature such that if something happens to you during this period, the insurance company will pay out a death benefit, but in addition to this will continue to fill the insurance premium from its own pocket and then pay your child a lump sum towards their college fees (or any other goal) at the time of the maturity of the plan. Consult your financial advisor on how these plans can be suitable for you and how best to use them in your financial planning.

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