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How to plan finances for you child

April 26, 2010 09:54 IST
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Any parent would be worried about how the various needs for his children would be met. The list too is long; that by itself is a cause of worry. This article will look at some of the common needs for children and ways to achieve them thorough financial planning.

School admission

Some schools today charge fees per year that was equivalent to what the parents would have paid for their entire schooling years.

Yes, today's parents are also earning much more than their parents. So the hike in fees can be attributed to inflation.

But more than the annual fees, there is the admission fee, which is a cause for concern. Starting from a low of Rs 5000 in rural schools this fee can go up to a couple of lakh for premier schools in premier cities. This fee has to be paid from the parent's pocket only as education loans (hic!) do not cover these.

The best way to tackle this fee is to start savings soon after child birth in bank/postal recurring deposit/debt mutual fund. The fee may be paid as early as 3.5 years from the child's birth (which is the minimum age requirement for the child to be admitted in LKG). Stock market is not preferred here as time is short and the dead line for the requirement is clear.

College education

A life insurance mutual fund with good (at least 20 times the premium) life cover is advisable for the long term requirements of child's education. This needs to be started immediately after birth to get the benefit of long term investing.

A monthly mode may be preferred for salaried people. Today's engineering education costs about Rs 4 lakh (Rs 400,000). Based on inflation, the cost after 18 years is expected to be close to Rs 16 lakh (Rs 1.6 million). This can be achieved by investing just Rs 1,500 per month for the next 18 years. This is considering 18% growth rate from a market fund.

A higher investment on a monthly basis (say Rs 2,000) in the ULIP will also support the parent to meet education needs like a computer at home and periodic requirements like bicycles, classes for music, dance, tennis, etc.

The reason the ULIP is recommended  is that for the long term above 10 years, the ULIP when used properly (tax free switching during market fluctuations, good cover, cost effective accident cover rider, systematic transfer during very low markets, etc) will prove to be more cost effective than the term plan + mutual fund combination.

Any additional need for college education and post graduation may be met using education loans.

Creating a marriage fund

The other major expense for a parent is the child's marriage -- be it a girl or a boy. 

Direct investing in the stock market by systematic accumulation of shares in selected companies can be a good strategy for the marriage.

To distinguish one's own trading account from the child's marriage fund account, a separate demat account may be opened. This will help to continue to accumulate wealth for the intended purpose and not use it up for some other emergency/ need.

The other options for the marriage fund are to use mutual funds, ULIPs. Products like Life insurance Endowment Plans, PPF, Deep Discount Bonds (at today's rates) are not suitable, as they are savings oriented plans and their returns only match inflation (or slightly exceed it).

Savings in these plans warrant a contribution which is atleast 120% more than the contribution required in market oriented plans.

Creating a marriage gift

Call it a marriage gift or dowry, a big chunk of the parent savings will go to the children during marriage. Instead of the traditional gold (which only matches inflation in its price) and car (which depreciates in value), parents can think of shifting to real estate in the form of land (and house) or an apartment.

This will help the child (son/ daughter) to live comfortably or convert it into cash with good return. They may even think of letting out the house for a good rental income.

If started early enough the investment for the marriage gift real estate need not be very high. These can be in the outskirts of the current city (any city) as there is sufficient time for the city to grow (and the value of your investment to grow).

Traditionalist could accumulate funds in mutual funds / stock market and convert them into gold just before the marriage this method has been proven to give returns of over 20 times compared to accumulating gold directly.

Meeting children's needs is an obligation for parents in India. With proper financial planning, the needs can be met without much stress. There has to be proper planning for different types of needs as they are of different periods and different amounts. This article has covered some of the most common needs that parents in India think of for their children.

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