The first time you hold your bundle of joy, a natural resolve sets in – “I will give my child the best of everything in life.” And this resolve starts with purchasing the best clothes, branded toys, fancy infant ware and whatnot. The fact is that these purchases cater more to your excitement of becoming a parent, than to the child’s joy.
However, ‘the best for the child’ needs to also include preparation for the important milestones of the child’s life – education, skill development, higher studies, marriage and possibly helping him/ her settle well in life.
We know it’s cruel to talk about expenses to a parent with regards to their child. But the financial onus of bringing up a child in these times is a profound reality. ‘Wants’ take precedence over ‘needs’ in this era and when it comes to children, it becomes even more difficult to distinguish between the two.
Financial planning is a must because life comes with its twists and turns. It becomes all the more important when you become a parent. Household expenses increase when a child arrives in the family. There may also be a loss in the family income if one parent decides to stay home to take care of the child. Good financial planning keeps you disciplined with regards to money and prepares you to handle any unexpected financial turmoil that might come up in life.
The first step in developing a sound financial plan is determining your net worth. Your net worth i.e. the value of your current assets minus current liabilities, helps you understand your present financial health. Tracking your net worth year-on-year can help you assess if you are on track to achieving your financial goals or are falling behind.
The second step is to identify your household income and expenses. The household income will the sum total of salaries of earning individuals, plus any other regular income from other sources like rent from house or shop, part time work etc. To understand your spending pattern, track your expenses for a few months. Segregate expenses into essential and non-essential. Dropping some non-essential expenses could help accommodate child-related expenses and thereby not affect savings.
Build an emergency fund – at least 6 months’ worth of living expenses and ideally even more. Keep this fund sacrosanct and keep contributing to it. This fund should spread across financial instruments that can be liquidated easily.
Life Insurance and Health Insurance are essential investments and should be made on priority. Your life insurance plan(s) should provide adequate coverage i.e. an amount that will help your dependents stay financially secure and comfortable in case you are not around. Adding riders like total and permanent disability rider, critical illness rider, etc. to your life insurance plan can help enhance protection.
Medical crisis can derail even a sound financial plan. Hence investing in a health insurance plan is advisable. Opt for a health plan considering your family’s health history and make sure that every family member is covered in the plan.
Education is the most important aspect of a child’s life. In India, the public education system is not well developed and hence parents prefer private schools. Private schools are burgeoning across the country and education has become a huge business. It is advisable to choose a school wisely and not get sold to the glamour and glitz of expensive schools.
Apart from school fees, education expenses also involve enrichment costs. Extra-curricular activities within school – camps, trips, competitions etc., as well as extra classes after school - sports, arts, singing, dancing, drama, extra tuitions etc. can become a huge overload. Plus, educations costs are rising exponentially by the day. Child life insurance plans are an ideal investment option in this scenario. These plans are designed to help you save systematically towards a child’s future goals – primary education, higher education, marriage, setting up a business etc. Your savings compound over the years helping negate the cost of inflation. Plus a child life insurance plan also ensures that the child’s future remains financially secure even in the unfortunate absence of parent(s).
Identify long-term and short-term life goals for yourself and your children. These will form the basis of your financial plan. Earnings, savings and investments need to be aligned to these goals. Life’s goals as well as your financial plan need to be revisited at regular intervals to ensure that your planning is on track with real life.
It is a good idea to make financial planning a family affair. This will instill financial values and discipline in your kids from a young age. Give them a fixed allowance and encourage them to handle their own finances – choose how they would like to spend or save their money.
Learn to ‘delay gratification’. Delayed gratification means giving up the temptation of instant pleasure to get a higher or more valuable pleasure in the future. This will also be an important life lesson for your kids.
