• 1 NOV 2018

    Financial Planning for Your Child’s Marriage

    “Preeti!”, Sanjay called out to his wife in an excited whisper. “See what Little Miss Moppet is up to now…”

    “Playing ghar ghar with her best friend! What’s new about that? See how well she’s making him do all the cooking, washing and the ironing…I wish I was that successful with making you work around the home!”

    “Couldn’t resist making a dig, hmm,” Sanjay retorted weakly,” but that’s not the point. The point is that it’s not long before she will be doing that in real life soon. Are we ready for that?!”

    Preeti said. “Are you insane? Deepika’s all of 2 years 8 months old now. Let’s enjoy her childhood, Michael Pinto…”

    “You don’t get me, yes of course we are enjoying her pranks…but I’d be happier if we can do it and at the same time look ahead to her future, her happiness in a career and marriage.”

    Preeti and Sanjay had already started investing in a modest endowment plan to fund their daughter’s higher education. But with this thought, they decided to explore how they could plan for Deepika’s wedding expenses. 

    They found online a clear step-by-step guide to plan for one’s child’s marriage.

    As a parent, you not only want your child to have a sound education, but also celebrations on important occasions like a grand wedding. But in order to fulfil these desires, it is crucial that you follow the right approach towards planning for your financial goals.

    1. When to start planning? The moment the pregnancy is confirmed!“See Preeti, we are already late”, Sanjay pointed out.
    1. What do to first?

    Evaluate your insurance cover and buy more if required. How to do this?

    Let us consider a couple with a two year old child. The male is the sole breadwinner. What would happen if he were to die today? His wife would have to manage everyday expenses of running the household, pay for the child’s education, etc., and source money for the child’s higher education and also marriage.Is his insurance cover large enough to handle all of this?

    Sanjay looked at her and shook his head, in the negative.

    One part of the insurance cover will have to be used for generating an inflation-protected income

          One part should provide for school education taking into account inflation

          One part should be invested for college education and marriage

          Therefore, in addition to the insurance cover, an implementation plan must be discussed with the spouse.

    1. Why invest for his/her marriage?

    Can’t he/she not handle it? Perhaps, perhaps not. The main aim to ensure your retirement savings are not affected by their wedding expenses. Inflation is one thing we just cannot plan for, but we certainly can start early, invest enough and aggressively.

    1. Where to invest for this?

    If you begin early, that is immediately after you child is born or earlier, you can have a 60:40 equity:debt allocation.

    If you begin when you child is 3 or 4 years old, there are about 15 to 18 years before they might want to get married. So you could opt for 30-40% equity and rest in debt.

    Equity/debt mutual funds are the best tools for such this purpose. Direct equity is too risky for this goal.

    If you have begun early there is no need to max the PPF investment. Invest as per asset allocation.

    If the allocation gets skewed because of a bull run, shift gains to PPF.

    1. Shifting Costs

    While planning for your child's needs, it always pays to start early. This will give you more time to meet your financial goals and build a bigger corpus. Consider the following example:

    Mrs Preeti Pinto has a daughter aged 2. She wants to create a marriage corpus that should be ready for her daughter in 22 years. Currently, Mrs Pinto imagines that she would spend Rs 15 lakhs on her marriage if it were happening today. How much would she need to save for her daughter's marriage every month to get her married after 22 years?

    If you calculate the Inflation rate at 10% p.a. for 22 years, the cost of the wedding would come to Rs 1.22 Crore!

    This means that the amount Mrs Pinto needs to invest per month is Rs 9,516. Assuming this investment earns a return of 12 percent per annum, it will help her realize this financial goal. However, if Mrs Pinto delays this investment, and starts to invest for her daughter's marriage after 5 years from now, then she would need to invest almost double i.e. Rs.18,464 per month. Hence you see, the earlier you start investing, the less you'll need to invest each month to achieve the same amount of money at the end of the goal.

    Hence you must select the right investment options so that your portfolio progresses towards each of the financial goals set for your children's better future. Selecting the ideal portfolio mix (Equity, Debt, Gold) could be a daunting task. But in the long term equities will largely help you to create the corpus required to meet the financial goals - even after adjusting for inflation. For most investors it would be prudent to exploit opportunities in the equity markets through equity and equity related mutual funds.

    If you are 10 years or more away from the wedding date, you may take a greater exposure to risky asset classes such as equities, for greater flexibility and opportunity to grow your wealth. Any setbacks the portfolio suffers can be recovered with sufficient time in hand.

    But when the goal is 3-10 years away, you can balance your portfolio with investments in equity and debt instruments. A near to ideal allocation could be 40 percent-50 percent in equities, 10 percent-15 percent in gold as a hedge to the equity exposure and balance in debt and fixed income products.

    It is vital that you keep your investments and insurance separate. The only role insurance must play in your life, is to protect you and your family from financial trouble.

    1. Where NOT to invest?

    Saving money in your savings bank account will not earn high returns.

    Any product that locks up money or matures beyond the time your child is likely to get married, is a no-no.

    Gold is not an investment option. If you want physical gold for their marriage, buy it. Do not invest in a gold ETF or gold fund. 

    Key points when planning your child’s wedding or future expenses:

    • Before preparing a financial plan, you must evaluate your children's future needs, and then start working towards chasing those 'need based goals'. Forecast the expenses that may arise in future
    • Begin the process of saving and investing early. This will enable you to create an adequate corpus for the fulfillment of your children's desires and ambitions
    • The financial decisions which determine your asset allocation and portfolio mix should be backed by your risk tolerance level (Income, Expenses, Financial responsibilities etc.) and risk appetite (Age, Past experience etc.)
    • Never dip into the funds saved for your other priorities (Retirement, Medical expenses, Housing rent etc.) to fund your child's wedding expenses.
    • Never get carried away by names of financial products. Evaluate their characteristics and viability before making any ad-hoc investment decisions
    • Always maintain an adequate insurance cover to cater to the expenses of your children (such as marriage or pursuing higher education) which may arise after your unfortunate demise
    • It is prudent to keep your investments and insurance separate. It is possible to fulfil the dreams you have envisioned for your children without jeopardizing your personal desires, with the help of sound financial planning and suitable asset allocation.

    “Okay Sanjay, when are you calling Yogi our financial consultant here for a consultation? I can already hear the wedding band!”

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  • 24 DEC. 2018

    Reasons why life insurance makes a perfect Christmas Gift!

    You may have gifted accessories, clothes, and even gadgets in the past but how about gifting a promise that secures your loved ones forever? Here’s how a life insurance plan can serve as a perfect gift this Christmas

    read more
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