Your child is now a child but forever will not be. Till your child is financially independent you will have to take care of her in all ways and this includes finances.
Actually planning ideally should start when you plan a baby. However anytime to start is a good time if not done already be it anything.
So what are the primary reason for which you should start financial planning for child?
- You have an additional member in the family and resources have to be arranged.
- Time is ever changing and inflation is on the rise. Your current funds are going to fall short if not invested properly at the right time.
- There are going to be unprecedented events in life when you need extra funds.
- Expenses for children can not and should not be deferred.
- Apart from basic expenses and your plans, children might need your financial support for various unplanned events for which you better be prepared.
7 Things to keep in mind while financial planning for your child
- Annual family income
- Age of your child(early childhood education) and the expenses that you can expect. This changes from time to time and depends on the age of your child as well.
- Age of earning members and how long they will continue to earn.
- Your next five year wishes that would need huge finances. For example if you wish to have a house or upgrade your house or buy a car etc.
- Whether you have funds reserved for next one year for basic needs. This will affect financial planning for your child as well.
- Reserve for unprecedented occurrences.
- Medical and Life insurances for all family members.
- Any likelihood of increase or decrease in family income, For example, If your business is doing well/unwell, if your spouse is planning to quit a job for any reason etc.
Informed decision on financial planning for child is always the best.
The following considerations are good to have before you start financial planning for your child or children. The market is flooded with financial advisors and products. All of them eventually need the following details to plan efficiently. According to me this is no rocket science. You can yourself do your planning. In case your financials are complicated or too diversified, you may consider hiring a professional. They need most of the following details. I would not like you to miss out on anything so that you can plan the best.
1. Short term Expenses
You can start jotting down your short term expenses that you can foresee. Say for the next two to three years.
Examples of short term expenses for the child are:
1.Immediate education – Goes higher with age usually
2.Special trainings like dance, music or extra curricular – What ever your Childs interests are
3.Medical expenses – Keep a reserve
4.Expenses of nannies, day care, driver etc who are expected do your job in your absence
5.Entertainment like holidays, movies , eating out etc
2. Long term expenses
Next Write down all your long term expenses that you can think of. This depends on your goals and aspirations and usually differ person to person and also child to child.
But a few of them are common to us all. For example,
- Higher Education cost – Take the age of your child , inflation, and current cost of any field( that will change). We will assume a few things to make our task easy.
- Cost of stay and food and travel if your child studies away from home – Not at all a rare possibility in recent times. We better have this reserve of funds.
3. Emergency / Medical fund
- Marriage fund – though I personally feel this is an unproductive cost in many ways, we however need some reserve keeping social norms in mind. Let the time come and you decide how much you want to spend on their marriage.
- In case your child is differently abled or has a rare skill, you need to back it up with special trainings. So you need a fund for that too as special skills are expensive to be trained at.
Write down all liabilities you have . Anything that drains your funds regularly and inevitable. For example,
- Any loans or debts
- If you are paying any kind of rent or maintenance
Assets can save you when there is a need and you fall short of your savings or investments. So Know how much worth of assets you have and what kind of assets are they. Find out,
- Worth of real estates /Land you own and the trend in the locality.
- Worth of your gold reserve if any.
- If you have a property on rent, it is an asset and there is an option to invest this amount and utilize it for your children’s future.
- Shares, bonds, mutual funds are all sources of funds if invested in the right direction. However the risk in on the higher side and planning to use them against any inevitable expense like children’s education and marriage is not a good option, unless you understand these well and good at predicting financial markets. It is a game that you play and if possible take informed decisions.
5. Family Income
Consider all kinds of income that your family generates from all sources. For example,
- Your salary or income from business
- Your spouse’s salary or income from business
- Rental income If any
- Income from Fixed deposits, shares, bonds or mutual funds
5.Income from other sources.
6. Environmental factors
Take in consideration the environmental factors that will mostly be beyond your control. They affect overall economy and it is going to affect your finances too. So you should keep these factors in mind before investing for your child because it is going to be a long term plan in most cases.
- Major world events in recent times that may affect your countries economy.
- Any natural calamity in recent time as they effect a countries economy as well.
- If you plan to change your location in future ie a change of country. As long as we live in an open economy, this is a possibility for any of us. If that’s your case, you need to plan accordingly for your child as the dynamics of your investment might change in such cases.
Keep in mind that a child’s needs will change and might not be exactly how you are planning. But eventually funds created through right investments is going to be the savior.
Take all the above 6 points in consideration before you start financial planning for your child. You can come to a figure that you know you will need at a certain stage of your life for your child. This if done correctly will look like an unreachable humongous figure. But trust me it is not. You will be able to achieve it, if you do it right. That is how all of us do and it is doable.
3 Tips on investments or financial planning for your child
- Since your child is a minor, keep in mind who is your trusted person who you can appoint as your nominee. Make sure the nominee is well informed and understands the financials.
- Your requirements will change as your child grows and might not exactly go as per plan. Make sure you are going through your financial planning for child once a year in detail.
Make changes if required. This way your plans will not fail you.
- Always have a financial product in your portfolio that gives compounded interests. For example a recurring deposit or SIP. This takes care of a lot of your needs.
- Keep separate plans for long term and short term investments as per the needs of your children and their age. Do not mix up both. This way your investments will do full term which is more benefits to you. Partial withdrawal may not be a good option from an investment.
To conclude this article, I would like to remind all parents like myself that finances are as important as your time spent on parenting. No amount of monetary resource will work if you do not spend time with your children. According to me the biggest investment you can make for your children is giving them your undivided attention and spending time.
With your involvement your child learns to understand money management and value systems and that in turn makes them capable of understanding how hard you work for her and what is the worth of your financial investments.
So spend time with your children and invest in TIME with them before MONEY.