The birth of a child in the family is one of the most joyous moments of our lives, it’s a celebration of life. Welcoming the new member of our family not only marks the beginning of a new chapter but is also a turning point in our life. Those who have just had a baby or likely to have one in the near future will know exactly what I am talking about.
When you ask new parents if they are really ready for this child, most likely the answer is “if we were not ready and prepared for a child we would not have had one, isn’t it?
However, it’s not that simple! What happens when a child is born? Most of us are generally short sighted. We feel that we earn well, can afford a good playschool, can afford the best kindergarten and then feel that we can afford good schooling, whether it’s an international school, boarding school or a school by the corner of our street. We feel we can afford it and hence we are ready and prepared for welcoming the child.
Here’s a truth: Most of us tend to be rather myopic, when we say we can afford it and most of the time we have a 4-5 year horizon in front of us. As a result we by default miss the whole picture. When the child turns 5 or 6 and starts schooling our friendly neighbourhood agent will advice us to do some planning for our child i.e. buy a policy. We get emotionally charged and buy some policy which will give our child some X amount of money when he is age Y and some more when he is age Z so on and so forth. So since we have a child today we have made some planning to provide the child some money in future which is based on our affordability today. This is the most common strategy.
Is this correct? No. It’s completely out of order and totally wrong in my professional opinion.
Whether that money will be sufficient, whether it will make sense for the child to receive it at some predefined time, would the money be of much value are questions that generally one does not have an answer to. No matter how much any product manufacturer proclaims there is no single product from any insurance company or a mutual fund that can totally suffice the planning requirements of your child’s future! If you believe or are made to believe that an insurance policy or a unit linked policy or a fund will help you overcome everything that you need for your child you are fooling yourself. You are in for a rude shock and the interesting part here is that you will not know until the last minute before the hurricane hits you. Parents with children in the age range of 12 to 20 know what I am talking about will appreciate this more. At this time parents feel maybe we have not done enough. My previous articles on education planning will also help you understand this point in detail.
So what should you really do to welcome your child?
If you want to really plan for your child the planning should span from about 6 months before the baby is born to his/her estimated age of marriage or in other words till such age as you feel he/she will be dependent on you. Overruns and contingencies must be provided from time to time as there will always be a possibility of requiring more than budgeted. You must be able to create a reservoir that will fund the following; Pre school, schooling, pocket money, books & stationery, additional extra curricular activities, special classes, coaching classes, private tuition fees, lodging and boarding cost in later years, cost of living in other cities for higher education. The funding plan must be such that you don’t have to really put your hands into your pockets for anything whatsoever. Everything comes out from a well crafted pool of money. Yes such a pool can only be created with good strategic planning and not by merely buying some insurance/unit-linked insurance policy. While I agree that we may need such a policy, but it is very individual specific and this requirement differs from person to person. We need to be prepared to think differently.
Planning strategy for your child rests on three broad pillars;
Planning age:
Planning should really begin about 6 months before the baby is born. This is the most appropriate time to start putting aside funds. If you start at child’s age 5 or 7 or later you have already lost agolden opportunity. Your funds could have doubled in 5-7 years. So by starting late you already have a weak base. Secondly we need a fair amount of money from about 6 months before pregnancy to about a year after child birth. From an age of 1 to the age of 4 or 5 we need sufficient provision for medical emergencies. This area is generally ignored. It’s important to have a strong foundation to build a monument, right?
Risk & Cashflow Management:
Responsibilities over the years would increase many fold. One of the first things to be done to mitigate medical contingencies would be to get a mediclaim cover for the child. This would provide a hedge against any medical contingency. Those employed should request an addition in their company’s mediclaim if such a facility exists. With a child being an addition to the family there will also be a significant addition to the monthly household expense budget. That would translate not only in increased cash outflows but also in making adjustments to the existing level of insurance cover one has. This would further increase the cash outflow. One needs to ensure that other financial goals do not get affected as a result of this increase in cash outflow. There needs to be a balancing act here. Please do not just buy a child policy on an adhoc basis. Child policies are the most expensive and more often than not are ridiculous saving decisions. Assessment of the exact level of increase in insurance is critical. Such increase in insurance cover may depend on the present value of all future expenses you think you will incur or you may not need any increase in insurance cover if there is a sufficient funding provision available today via an education funding plan. The current investment direction may then need a short term modification.
Funding Plan and estate management:
Once the insurance provision is in control one then needs to create an investment plan so that a reservoir is created which will fund the entire career and dependent years. This is a complex exercise wherein we need to make funding estimations for each year that the child is likely to be dependent on us. Thereafter based on current affordability an education funding plan may be prepared so as to meet all financial objectives say over a 20 to 25 year timeframe. Once the cashflow pattern is clear then a suitable portfolio must be created.
Find out how to and how much to save up for your child
The portfolio of instruments would depend on the amount required at various points in time over the next 20/25 years. It could consist of a mix of insurance policies, mutual funds, bonds, FD’s, bullion etc. to be used smartly & repetitively at different points of time. Obviously, this needs careful planning. Once this is done it must be reviewed regularly to accommodate for changes in budgets and future provisions. Invariably there will be changes and many a times overruns as well. A funding plan helps you to take corrective action many years in advance. We also need to make amendments in our Will. However most of us don’t have a Will, unfortunately. Life is uncertain and we all agree to that so why leave this gap open. This is a good opportunity to safeguard your family’s future. Most people don’t know and think that nomination can sort the matters out. Consider this; Nomination is the right to receive and not necessarily right to ownership of the asset according to the Indian law. Hence nomination on its own is not good enough and thus a valid Will is a critical necessity.
So, are we then REALLY prepared to welcome the new born?