Financial Planning for Child: Importance and Benefits

“Preeti!”, Sanjay called out to his wife with excitement “See what our Little Miss Moppet is up to now”

“Playing in her playhouse 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 in making you work at home!”

“Couldn’t resist taking 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 just enjoy her childhood!”

“You don’t get me, do you? Yes, of course, we are enjoying her pranks. But I would be happier if we can do it while planning for her future, her career and her marriage.”

Preeti and Sanjay had already started investing in a modest endowment plan as their first step in child financial planning. But with this thought, they decided to explore how they could figure out the best investment plan for daughter marriage.

They found a clear step-by-step guide online that explained the importance of financial planning for children while focusing on a child’s marriage financial planning.

As a parent, you not only want your child to have a sound education but also want them to celebrate important occasions like his/her wedding. But to fulfil these desires, you must follow the right approach towards planning for your financial goals.

1. When to start child financial planning?
   The moment the pregnancy is confirmed! “See Preeti, we are already late”, Sanjay pointed out.
2. What do to first? Evaluate your insurance coverage and buy more if required.
3. How to do this?

Let us consider a couple with a two-year-old child. The father 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, and manage major expenses like higher education and marriage. Is his insurance cover large enough to cover 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 in college education and marriage

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

1. Why your child’s marriage financial planning is important?

   Can’t he/she not handle it? Perhaps, perhaps not. The main aim is 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.

2. Where to invest?

   An important part of financial planning for children is to know where to invest and to what extent.

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

   If you begin when your 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 a 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.

3. 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? In her bid to find out the best investment plan for daughter marriage, she makes a few calculations as listed below.

   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 % 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.

   How to decide on the portfolio mix based on the time on hand before the wedding date

   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. For example, the market crashes or the economy goes under a recession, your investments may suffer. But if you have ample time on hand, you will be able to recover the losses.

   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 per cent to 50 per cent in equities, 10 per cent to 15 per cent in gold as a hedge to the equity exposure and balance in debt and fixed income products.

   You must 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.

4. 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 his/her marriage, buy it. Do not invest in a gold ETF or gold fund.

Key points when you do marriage financial planning for your child or other future expenses:

• Before starting with financial planning for the child, you must evaluate your child’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 fulfilment of your children’s desires and ambitions. This is the ultimate advice when you are looking for the best investment plan for your daughter’s marriage.
• 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, 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.
• When you start financial planning for your child, 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 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!”

Siddhant Dubey - Writer & Photographer
Siddhant works as a freelance content writer who is interested in a wide range of spheres from photography and personal finance to cooking. He is also an aspiring photographer striving to showcase life around him through his vision.