Thinks about - Child Education and Future Plan
"The birth of a child is one of the most important events in one’s life
– other than the celebration; it brings maturity and responsibility to
the parents. It also brings seriousness regarding our financial life
and if we talk about priority of goals, sometimes Child Future Plan is
even a shade above retirement planning."
There has been a paradigm shift in the thought process of people
and generally they don’t make any distinction between sons and
daughters. Socially their thinking may have changed but financially
they still belong to that old school which is happy with buying
insurance policies or some bonds in name of the children. Few
new age parents have started buying child Unit Linked Insurance
Plans (ULIPs) rather than money-back policies.
Some examples are – ULIP’s are deducting your contribution initially
by smart percentage, to recover the same You have to hold policy at
least for 10 years, and then your investment will start to earn,
return on investment was merely 5% to 7%.
Amount needed for education accumulation through insurance? Is it
Insurance or Investment? Is it actually a smart strategy? The
simple answer is NO. Emotional sales take place where investors
take decisions based on their emotions. Parents are attracted by
emotional pitches like “Bunty’s fees” and they end up buying
expensive products.
Child Plan – before birth
So what’s the solution? It’s always prudent to enter into a situation
well prepared and in a planned manner which is going to affect your
financial Life. In fact planning for child’s future and managing of the
finances should start much before a child is born. Have a proper
plan (please read this as planning because people think a plan
means a product) for the children’s future. You can do following few
things as soon as you get married:
1. Buy a health insurance policy with maternity benefit:
Now-a-days there are many health insurance policies which have
maternity benefit as a special feature. Expenses at hospitals and
regular checkups are mounting day-by-day and this feature will
help in reducing the burden on finances. If you are employed you
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can check whether this feature is there in the employer provided
policy.
2. Start a baby fund by regularly setting aside an amount every
month to manage the expenses related to vaccinations and other
medical check-ups. This amount has to be increased by an
appropriate amount if both parents are working and after the
child’s birth the wife is planning to quit the job or remain on leave
even after maternity leave is over.
3. Start hunting for bargain deals on baby equipments. Buying
the best car seat, stroller etc. for the child’s safety and comfort.
Paying the full price is often a waste of money. Babies quickly
outgrow many of these items. It is advisable to start checking
with friends and acquaintances and stores that sell used goods;
your baby will never know the difference. And this in turn will
save you a lot of money.
4. You should have a thorough understanding of your finances. You
should not enter into this responsibility if you are burdened with
debt. Your EMI should not be more than 10-20% of your
income at this stage since your expenses are going to increase
soon.
Now let’s come to a second stage, and you will find that raising a
child is not a child’s play. Though childcare is expensive for
infants, even when your child is old enough to go to school then
apart from school fees, you will have after-school care,
extracurricular activities, summer camps etc. Well to manage these
expenses it is advisable to make it a part of current cash flow so
that you do not overspend on other expenses. This is high time
to start planning for long term goals and start saving for child’s
higher education and marriage expenses.
Child Education Plan – long term goals
Then you become gender biased. What?? But you said “There no
any difference between son and daughter.” Still there are some
sociel concerns which many people don’t want to overlook. For e.g.
spending heavily on a daughter’s marriage. You may compromise on
the son’s marriage but for the daughter’s marriage no parent wants
to cut expenses. So this becomes one of the major goals in life.
Concerns about helping the son settle down, gifting the daughtersin-
law on some regular occasions and festivals and taking care of
the children (even after marriage) are concerns for most of the
parents these days. So, this increases the importance of financial
planning. Now-a-days, people are not only concerned about
accumulation but also the distribution aspect. Savings are important
but your planning should be tax efficient also.
Looking at mounting inflation if you keep on delaying the savings
part then you could be in a major mess later. Looking at some
societal obligations which in turn affect the personal goals
achievement we here by suggest some tips which can be helpful in
achieving the goals comfortably in your own way.
1.) Open Public Provident Fund (PPF) account:
The moment the child receives the first monetary gift,
open a PPF account in his/her name. Do ensure that
whatever child receives it should be used only for
his/her benefit. This will in turn ease your pressure of
saving.
2.) Start saving with a proper asset allocation:
You should be clear on the money value of your goals
before starting any saving. Goal value should be
inflation-adjusted. Try to use only those instruments
which provide tax-free returns like PPF and equity
(through mutual funds). If the returns are taxable
then the return amount will be added back to the
parent’s income and taxed as per the slab in which
parent is in.
3.) Buy Gold:
Not because gold prices are going to move higher but
to make it part of your overall asset allocation. If you
are one of those who is having big dreams regarding
daughter’s marriage – you will need gold.
4.) Education:
You can compromise on savings for your son’s
education as one can comfortably get education loan
whenever or if required. But for the daughter’s
education you should save adequately as you may not
want your daughter to keep on paying the education
loan EMIs even after marriage.
5.) Get Insured:
Never purchase insurance in the name of your child.
Understand the importance and purpose of insurance.
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It is to be purchased to manage the risk prevalent in
one’s life – death, health problems, and accidents. If
you want your goals to be met comfortably then
proper insurance planning is inevitable. Also what is
important is sum assured and not the number of
policies.
6.) Do proper retirement planning:
If you want your children to be really happy in their
life then you should do your retirement
planning properly. No parent wants his/her daughter
to remain worried about them after getting married.
Even in the case of the son there are chances that
after getting into professional life or after marriage, he
may not be able to support the parents properly and if
at that time you become dependent on him then it will
create unnecessary pressure in your and his mind.
Future Plan
1. Give gifts through Trust:
From the point of view of proper tax planning and safety of
investments for the benefit of married daughter, father can create a
private trust in the name of daughter. It helps in practical handling
of the married daughter’s funds. If a direct gift is made to the
daughter, all the investments normally are in the name of the
daughter who takes them with her to her father-in-law’s house after
marriage. If by chance there is a financial crisis in her husband’s
family, she could be persuaded to part with the investments
standing in her name for the sake of her husband’s family. In such a
case, it may also happen that she may not be able to replenish the
same for considerable time. Therefore to save the funds or wealth of
the married daughter from being sold away under the pressure of
husband or in-laws, it is advisable to have a trust for the married
daughter. If investments for the benefit of married daughter stand
in the name of trustees of the trust it is not possible for anyone to
ask the trustees to part with the investments just to meet personal
or business obligations of the family.
2. Trust for major son:
Creating a trust for the major son has its own practical advantage
particularly while he is studying or is not fully settled in life. In this
way the funds can be protected from being frittered away if the son
were to have the funds in his name only. Thus where the son
operates a bank account and makes investments of funds belonging
to him particularly when he is studying, there is the risk of his
misusing the funds or recklessly spending the funds or wasting
them. This abuse of funds can be prevented by having a private
trust for his benefit. In this case a bank account can be operated by
the trustees who may include the parents of the son as well. If you
want to save money for your son’s future business planning, then
you can do the same by transferring money to this trust.
3. Do proper estate planning:
If you are really concerned about you children’s future and want to
reduce their hardships, then proper estate planning is vital. You
should write a proper and tax efficient Will which helps in proper
distribution of wealth among your children. You can create different
tax files by not allocating the assets directly to the children but to
his Hindu Undivided Family (HUF), grandson / granddaughter. You
can also create a Trust through your Will. This is the most important
exercise which you should do at the moment your child is born. You
can write in the Will as to how your insurance proceeds and other
assets are to be utilized/distributed in case of your demise before
the achievement of planned goals.
Planning is bringing the future into the present so that you
can do something about it now. Someone rightly said “A
good plan today is better than a perfect plan
tomorrow”. So do not delay and prepare a plan today.
