Take a quick check around you; what is the single most important thing for parents? Most would settle at “the best possible future of our child.” This is natural, fair and absolutely reasonable. There is nothing to contest the purity of this emotion save & except your own actions.
Financial Planning for your child does not mean buying a traditional child insurance policy; this infact is the worse thing to do. It also does not mean buying some “packed with features” ULIP policy or opening a PPF account or making a fixed deposit or starting a recurring deposit. It does mean buying shares or property or a painting. Remember, planning is about planning and not products?
Say the child is about 2 years now. It might be hard to digest but most families may need to budget to spend about Rs. 1 crore for that one child over the next 23-25 years. Here’s why:
Consider planning for important milestones in the child’s life. Listed in the table below are fair estimates of the cost today and we have simply projected the cost @ 8% inflation. Basically what this means is at when your child is of age 23 and if he / she were to pursue post grad education, for which the current cost is 3 lacs you may want to be ready to spend about 16 lacs or so.
|
Child’s Age |
Education Level |
Current Funding Estimate (Rs.) |
Future Value with inflation at 8% p.a. (Rs. ) |
|
15 |
Class 10 |
50,000 |
135,981 |
|
16 |
Class 11 |
30,000 |
88,116 |
|
17 |
Class 12 |
50,000 |
158,608 |
|
18 |
Professional Year 1 |
150,000 |
513,891 |
|
19 |
Professional Year 2 |
150,000 |
555,003 |
|
20 |
Professional Year 3 |
150,000 |
599,403 |
|
21 |
Professional Year 4 |
150,000 |
647,355 |
|
22 |
Professional Year 5 |
150,000 |
699,144 |
|
23 |
Post – Grad. Year 1 |
300,000 |
1,510,150 |
|
24 |
Post – Grad. Year 2 |
300,000 |
1,630,962 |
|
25 |
Wedding |
500,000 |
2,935,732 |
|
TOTAL
|
1,980,000 = Rs. 20 lacs approx |
9,474,345 = Rs. 95 lacs approx |
If you were to add the amount you spend for your child primary education, over the next 23 years or so in total you would have spent over Rs. 1 crore.
How do we try and achieve this? Around us we find a world full of options with best of marketing trying to woo our attention. The best strategy in any case is always to go with what is best suited to your budget, circumstances and other financial goals. In simpler words if you have ample money to spare you can afford a lower risk strategy not otherwise. Here are some strategy options for your consideration:
- Expecting 4% returns i.e. via popular children’s policies you need to invest about Rs. 50 lacs lumpsum or Rs. 26,000 per month starting now. Many fancy child policies would yield about 2-5% rate of return in current and likely future scenario.
- Expecting 8% returns i.e. via PPF / RD / FD / bonds etc you need to invest about Rs. 24 lacs lumpsum or Rs. 19,000 per month starting now.
- Expecting 10%-12% returns i.e. via child ULIPs / balanced funds etc you need to invest between about Rs. 13 – 17 lacs lumpsum or Rs. 13 – 16,000 per month starting now.
- Expecting 14% p.a. returns i.e. 90% plus equity strategy you need to invest Rs. 10 lacs lumpsum or Rs. 12,000 per month starting now.
Ideally education funding plan should be a part of your overall Financial Planning. Thus one needs to choose a strategy based on overall investing capability and the budgets you can afford today, nothing else. Emotional aspects of risk, fear, apprehension, insurance etc need to be weighed against financial prudence. Only then will the possibility of really gifting the world to your child becomes high.