Financial planning for children: Worried about your kids future? Get money-ready this way
Building funds for their children is the topmost priority for parents. While watching kids grow is a most satisfying thing, it is critically important to get them ready for the real world and that means taking care of their future needs.
Building funds for their children is the topmost priority for parents. While watching kids grow is a most satisfying thing, it is critically important to get them ready for the real world and that means taking care of their future needs. If that is not done, then these children will be left behind. Even as parents take care of primary education and other expenses, but higher education needs and even marriage can put a hole in pocket and parents need to ensure that enough money is made available to them to become capable individuals who can stand on their own feet. The only way to avoid getting into trouble is by planning early and to be totally ready when the time comes to spend. Archit Gupta, Founder & CEO ClearTax told Zee Business Online that parents need to organise their resources and make plans on the basis of their aspirations.
"Kids are dependent on the parents for all needs. As a parent, you need to organise the resources and make a plan based on the underlying aspirations. It can be children’s higher education or planning for their marriage. This planning should start as soon as possible," Gupta said, while adding that couples should also keep an investment horizon in mind. "It will help you to determine your risk tolerance and in choosing the right product," he explained.
Traditionally, most parents like to keep children away from financial discussions. But, Gupta believes that involving them in financial planning is essential as it helps in developing the habit of saving money. "This includes imparting the habit of saving, teaching them the value of money and hard work, getting less vulnerable to impulsive demands and managing oneself as per the resources at hand," he said.
How to set goals, start investing?
Even though most people are able to identify their goals, they often miscalculate the amount of money that would be required to achieve them. This could be done by estimating the amount that is required for achieving a specific goal like children’s higher education and taking in account other related costs around them. Parents also need to consider the savings they already have for the goal. This would allow them to find out how much extra they need to accumulate.
"In case of higher education, the extra cost will include the cost of books, transportation and coaching required to appear for competitive exams. While computing the size of the corpus, keep inflation factor in mind. If the goal is 15 years away and today it costs Rs 5 lakh, then assuming 6% inflation, it’s future value will be around Rs 12 lakh. For other goals, you may consider similar guidelines," Gupta explained.
Get Insurance cover
While it is important to grow your money and be ready for future, it is also important to be prepared for emergencies. This includes risk cover. All couples should look to buy term insurance that takes care of their child's needs in case they are not around. This will also make sure that your investments are untouched in case of a mishap.
"You may buy term insurance which will take care of your kids’ needs in case you are not around. It will prevent unplanned withdrawal of investments for other purposes. The risk cover may be about 12-15 times your annual income. Apart from that, you may also create an emergency fund as a buffer for a sudden job loss or medical emergency," Gupta said.
Prepare children's funds
Gupta explained that these days you may find mutual funds meant for children known as Children’s Funds. These investment schemes put money in both equity as well as debt in specific proportion based on the risk profile. They have a lock-in period of 5 years.
"These are mutual fund schemes which invest in both equity and debt in specific proportion based on the risk profile. It comes with a lock-in period of 5 years during which you need to stay invested in the fund. In case you don’t find them suitable, you may invest in a diversified equity fund as well. Such funds also generate higher returns along with greater flexibility for intermediate withdrawals. These have higher liquidity with low exit loads," Gupta said.