New parent? Think money now

Babies are fun. Their toothless smiles, tinkling gurgles and endless squeals are uplifting. But their diaper changes, sleepless nights and endless crying might not quite be so uplifting!

What might worry you, though, is a whole world of finances to work out. (No wonder today's young parents have fewer kids or none at all.) With expensive play school and a host of toys s/he loses interest in alarmingly fast, young parents need to think about the big picture.

Here's a fact: even if you think long term and buy a policy that will give your child chunks of money at various stages in life, your work is still not done!

Here's why: have you thought whether that money is sufficient, whether it makes sense for your child to get it at that time, or even whether the money would be of much value?

Chances are, you have not. No matter how much any product manufacturer claims, no insurance product or mutual fund can suffice the planning requirements of your child's future.

Wake up NOW

The right approach

• Plan until your child gets married or till you feel s/he will be dependent on you.

• Always provide for overruns and contingencies -- you might need more than budgeted.

• Create a reservoir that will fund pre-school, schooling, pocket money, books and stationery, extracurricular activities, special classes, coaching classes, private tuition fees, lodging and boarding cost in later years and cost of living in other cities for higher education.

• You should not have to dig into your pockets for anything. Everything must come from a well-crafted pool of money. Create this pool with strategic planning, not merely buying some insurance/ unit-linked insurance policy. You might need this policy, but it is very individual specific and the requirement differs from person to person.

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Planning strategy for your child

• Plan early Begin planning about six months before your baby is born. If you start later, say, at five years, you would have already lost a golden opportunity. Funds can double in five to seven years. You need a fair amount of money from your pregnancy to about a year after childbirth. Also, from age one to age four or five, you need sufficient provision for medical emergencies.

• Risk and cash flow management Responsibilities over the years would increase manifold. Here is how you can manage cash flow.

a. Get a mediclaim cover for your child. If you are employed, request an addition in your company’s mediclaim if such a facility exists.

b. Account for increased cash outflow in your monthly household expense budget, with a child around.

c. Policies for children are expensive. Buy yours after assessing the exact level of increase in insurance so that other financial goals are not affected with increased cash flow.

This increased insurance cover may depend on the current value of all future expenses you think you will incur. You might also not need any increase in insurance cover if there is sufficient funding through an education funding plan.

• Funding plan and estate management

This complex exercise kicks in once your insurance provision is in control.

a. Draft an investment plan that helps you create a reservoir that funds your work life and your child's dependent years. Make funding estimations for each year your child is likely to be dependent on you.

b. Based on what you can afford, prepare an education funding plan to meet your financial objectives, say, over a 20 to 25-year time frame.

c. Now create a suitable portfolio. The instruments would depend on the amount required at various points over 20 to 25 years. It could consist of insurance policies, mutual funds, bonds, fixed deposits,

bullion, etc, to be used smartly and repetitively at different times.

d. Review your portfolio regularly to accommodate for changes in budgets and future provisions. Invariably, there will be changes and many a time, overruns as well.

Finally, do make amendments in your will. This will safeguard your family's future.

Most people think a nomination sorts matters out. But Indian law says a nomination is the right to receive and not necessarily the right to ownership of the asset. So make sure you have a valid will.

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