Child on the Way? Rethink your Finances!

child on the way

So you are now on a new journey called parenthood. Since you have a child on the way, it is time to give a serious thought to the fact that your new parenthood brings a whole lot of new financial responsibilities. How far are you prepared?

It is crucial to have your financial planning in place even before you plan for a new baby. After all, who would like to be taken by surprise at every occasion involving huge expenditure? So use some foresight and have a good financial plan for your child on the way.

Financial needs of the child

The expenses associated with bringing up a child can be classified as near term (immediate) and long term expenses

Near (Short) Term Needs:

1. To start with, newborn babies are prone to infections at the slightest provocation of weather or environment. That calls for frequent visits to the pediatricians involving considerable expenses and in some cases for crèches and nannies.

2. Then there will be a regular outflow of money for bringing up the baby.

3. Similarly at the time of starting school in the toddler years, and from thereon long years of regular educational expenditure.

What is near term and what is long term can get confusing, so you can consider any expenditure for the first 3 years after child birth as near term, and assume the rest as long term needs.

Long Term Needs:

1. After the age of 3 or so when the child joins a good school – huge donations or capitation fees can burn a hole in your pocket.

2. Once the child grows up there are other usual expenses of bringing up the child and for higher education and special training etc.

3. For study abroad or specialized education at the University level, you need to plan even more carefully.

4. Of course there are marriage and other long term expenses

So start early and track them regularly for each financial goal; save in small bits that can come in handy at the right time. Taking into account the child’s age and inflation levels, you must have the target amount that takes care of all those financial goals such as education and even marriage of your children. Your insurance and investments should factor these long term needs. Start rethinking your finances for child on the way – Now !

Be prepared financially

Re-evaluate your own Insurance:

Life Insurance comes in handy for you to be a well prepared parent financially. The child is another dependent for at least the next 18-20 years. So you should increase your existing life insurance or buy additional cover keeping in mind the probable need of the child.

For instance Arjun who started his career at the age of 23 required no insurance because he and his father were the only members in his family. Arjun required little or no insurance because he was earning a good salary and his father had his monthly pension so Arjun had virtually no dependants so he opted for an insurance with a life cover of Rs.1 lakh .

Recently when he turned 26 he got married to Ramya who is a homemaker (house wife). Arjun now decided to buy term insurance so that in case of his demise Ramya is protected. This can also be more useful when they have children. So he took another insurance policy with a cover of Rs.5 lakhs, which makes his total insurance Rs. 6 lakhs.

It has been proved by research that insurance is the best financial instrument to ensure protection against any eventuality. Life insurance should be bought with relevance to your financial planning for the needs of your children at various stages of their lives. More and more people have realized the importance of life insurance and have started early to reap higher benefits.

Always choose a Term insurance plan for better coverage instead of opting for a whole life plan. Read more at our blog on choosing the best life insurance plan

Child Insurance Plans:

Please do not buy “child” based life insurance plans.

Some of these plans are offered with additional features to provide cash flow at various points of time (after x years) to take care of needs of children. Sounds good but this has the same disadvantages that whole life policies and money back policies have – high premium and long term lock-ins. Given these draw back you can rather invest the same money in a diversified equity mutual fund. The returns will be far greater

Reevaluate Investments

Start saving additional money in a SIP (systematic investment plan). Choose a couple of good diversified equity funds focused on Large cap and mid cap stocks. If you start saving on this so-called child’s future fund from the day of your child’s birth – you will have ample time to invest and grow through power of compounding.

For instance if you invest Rs.5000 every month for the next 18 years in a diversified fund, and lets assume it generates 12% returns p.a. After 18 years your investment will be worth Rs.278,748. This is the power of compounding, which is further enhanced by regular and disciplined investing.

Learn about the power of compounding and systematic investment plans at our blog – SIP in mutual funds

Conclusion – Child on the way

Every parent has the responsibility of ensuring a good future for his/her spouse and children. When children grow up and become independent you really begin to feel the fruits of all your efforts. Setting a good example for your children will bring more positive energy and prosperity to the family.

Child on the way? Nothing to fret about. When parents plan well for their child’s future they will be able to provide for most of the needs of the child such as education, hobbies, health needs, entertainment, etc, which will ensure a good quality of life.

This positive energy will further radiate and set a good example when your children become independent have their own family in future. To put it in a nutshell financial planning is a key tool to help you and your family reach some of the key milestones in life.

So if you really want to truly enjoy the fruits of financial planning, don’t hesitate to put in that little extra effort to discuss your financial goals with a professional financial planner. You can read about choosing a financial planner and financial planning process itself at our blog – what is financial planning

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About the Author

Sridhar is a financial analyst and his work experience spans areas of financial analysis, modeling, valuation and research on companies, specific sectors, etc. Sridhar is an MBA graduate with Finance major from Maharishi Institute of Management.

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