Plan for your child's future

Someone once said that the only thing children wear out faster than shoes are parents. Not just physically, mentally and emotionally, but also financially. No, we are not disputing the rewards and fulfilment that only parents gain, but there are few things as expensive as bringing up a child. As Rajesh Dalmia, a Kolkata-based financial planner, says, “When it comes to raising children, money is limited and the demands far exceed the supply. Your financial commitments are driven by your child.”

Rajni and Ravi Batra realised the expenses imminent in raising their child right from the time they found out that Rajni was pregnant. “The first few visits to the doctor were indicative of what was in store,” says Ravi. Apart from the expense, there was the fact that Rajni took a six-month break from work, leaving them to manage on a single income. This is often the case with young, dual-income families. Despite this, many new parents run amok looking for what’s best for their baby, regardless of the fact that they might wipe out their retirement savings during the child’s first birthday bash.

Managing your finances is sometimes akin to a massive juggling act, where you often have to keep several things going at once— savings, investment, spending. The addition of a child to this mix adds a further level of complication. And unlike, say a car or a house, you cannot get rid of the child because he/she is getting too expensive to raise! Also, you can’t give up eating simply because Junior needs to go to the summer camp.

So, what can you do to ensure that your day-to-day expenses are taken care of, that your future financial plans are not ruined, and you still give your child the best that money can buy? The short answer to that is a ‘plan’. Don’t assume that the money will materialise from somewhere when it’s time to pay the doctor or school. And always bear in mind the fact that expenses will only mount as the child grows older. “To understand the costs that a child will bring in to your life is best understood by splicing the child’s growth into three or four stages. After all, it will be at least 20-25 years before your child can start earning,” says Dalmia. And that’s what we’ve done here: to explain how it is possible to plan your finances to include the best for your child.

The first 40 weeks

“I want the best for my wife and child,” says Ravi, who realised that medical expenses would soon get out of hand if he did not do something about them. “I took a package from the nursing home close to my house for the entire pregnancy,” he adds. Batra’s move makes sense, given that most large hospitals and nursing homes offer special packages for delivery as well as pre- and post-delivery care. Often, these packages work out cheaper than paying for individual pre- and postnatal services.

Where does the money for this come from, you might ask. As the Batras found, a child also means entering a phase when the family lives on a single income; financial outflows rise but inflows are reduced. The only way to be able to pay all the bills is to start planning early. “Though there is no defined financial product to meet the expenses at this stage, it will be good to set aside a fund for the child as soon you get married and create a corpus to take care of pregnancy and delivery,” says Zankhana Shah, a Mumbai-based financial planner.

Considering that the bulk of the cost goes towards the delivery, it may be a good idea to start a systematic investment plan a year in advance (that’s before you plan for a child) and create a child emergency fund as soon as you conceive.

Toddlers and pre-schoolers

Babies tend to outgrow things even before you buy them—from clothes and prams to walkers and toys. This means a steady stream of money disappearing into the clutches of ecstatic shopkeepers. The good news is that family and friends tend to gift the new parents with cash. “Even though it may seem early, it’s the time to put all those cheques to use and start planning for the child’s future,” says Shah. Some parents use this money to pay the hospital bills and to meet the expenses associated with traditional religious celebrations. Others prefer to put this money away for the child’s use in future.

There are a few structured plans that address safeguarding for a child’s future. These are generally offered by insurance companies, and there are a few mutual fund schemes tailored for parents. You might find it worth your while to explore these products, or you can come up with savings models of your own. That’s what S. Balaji of Bengaluru has done. “I bought gold with all the cash gifts that we and our daughter received in the first few years. It’s an investment that you don’t touch unless pushed to the corner,” he says. As he says, even in the unlikely event of gold prices falling dramatically, the cache of gold will help create some jewellery for his daughter later in life.

The school years

You’ve seen those snaking queues of distraught parents waiting outside school offices for admission forms. Along with the traumatic exercise of getting the child admitted to the “right” school there’s the looming shadow of hefty fees and related expenses. From the time the child starts going to pre-school till he enters college will be one long period of spending for the parents. Think school fees, think swimming and tennis classes, clothes, birthday parties, books, holidays, transport…the list is endless.

Most of these expenses are unavoidable. So, consider this a long-term recurring expense and factor it into your family budget. “Your cash flows will need to be maintained to get a good sense of where the money for your child is going. The child may need tuitions or take up a sporting activity, all of which need to be accounted for,” says Shah.

To manage additional resources for your school-going children, it is necessary that you increase your emergency fund buffer and start creating a savings platform for your child. Bengaluru-based N. Mahadevan has bought HDFC’s Young Star plan to meet the cost of his child’s higher education. “I factored in the routine schooling and growing up expenses for my son, but the rising education costs, especially for professional courses, made me shop for a plan that would create a corpus for my son,” he says.

College and after

The terrible teens will have an equally terrible impact on your finances, even if you are prepared for some extra cost. More pocket money, more clothes, increased telephone bills, steeper tuition fees. It’s the last that could break the bank. Unless your child manages to get a full scholarship, be prepared to shell out a few lakhs on college—and several lakhs if a professional course is involved.

While you can probably take care of regular expenses, you should definitely plan in advance for your child’s college admission (age 17-18) and higher education (age 21-22). You’ll need a large fortune if your child wants to study abroad—consider paying at least $40,000 for a short stint at a reputed school. Then, there’s the small matter of wedding expenses and providing some capital if your child wants to set up a business. Given the extravaganzas that most Indian weddings are, be prepared to shell out more than a few lakhs on this; even a “modest” ceremony can cost over Rs 1.5 lakh.

Most parents are willing to make adjustments in other areas, but are generally determined to give their child the best possible education. “I can compromise on my financial plan for retirement to ensure good coaching and education for my daughter, especially during the final two years of schooling,” says Balaji. He has bought a child plan from ICICI Prudential Life for his daughter, which will start paying back as soon as she turns 18.

Such child plans from insurance companies are your best bet in planning for these milestones. These plans work on the basic premise of insuring your life while creating a corpus for your child to be redeemed at select milestone years—entering college, finishing college, etc. These products offer lump-sum payouts over a span of 5-7 years, depending on the policy. “While there are bank accounts for children and credit cards for them as well, there are only a few child plans from insurers and mutual funds that address the biggest financial goal,” says Anjana Grewal, senior V-P, Birla Sun Life Insurance. The biggest advantage of these plans is the life cover offered to the parent, which ensures that the proceeds reach the child at the promised age of education.

The bottom line is clear: a child might well be a blessing, but is also definitely a long-term expense. The good news is that there are childspecific financial products available, albeit not as many as there ought to be. Choose from what’s on offer or structure your own plan. But don’t forget that in order to enjoy your years as a parent, you simply must start planning your finances even before you start planning a baby. 

“If you have worked well on your financial goals, the child can be accommodated easily” —Anjana Grewal, Senior V-P, marketing and communication, Birla Sun Life Insurance

“In case of children, there are many costs that are not accounted for under any specific head” — Rajesh Dalmia, Financial Planner, Kolkata