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Babynomics - Financial planning for your kid’s future is no child’s play

It’s a boy! It’s a girl!

Whatever may be the good news, the joy of a baby arriving should not get marred by the financial stress and constraints that usually come with raising a child. As the baby grows so will your expenses. Yes, there will be a range of new overheads, but if you plan and invest wisely for the child’s future, you will have much less to be concerned about.

Before the baby arrives

The moment you think of having a baby, you need to start saving for the pre-delivery and delivery medical expenses. During the pre-natal period, there will be regular doctor consultations (think every 2-3 weeks), several diagnostic tests, multiple ultrasounds and maybe a list of prescribed medicines and injections. These itself may cost around Rs. 1 lakh. Additionally, the actual delivery from any top private hospital may cost upwards of Rs. 2-2.5 lakhs. So you need to build this minimum medical corpus in addition to your emergency corpus.

If you are a beneficiary of any group Mediclaim cover by your employer, check on the maternity benefit coverage. Most individual private health insurance plans cover a very small portion of the expenses, usually set at around 20-40k, and with a lot of hidden clauses.

Secure your child

Getting insurance should be one of the first financial steps you should take to secure your child’s future in case something unfortunate were to happen to you. Get a life insurance term plan that is at least 8-10 times your annual income- the logic assumes the going bank interest rate to be around 8%. Your child should be able to attain his/her dreams whether you are around or not, and your family too, should be able to meet their monthly expenses comfortably. So interest accrued on the insurance claim, deposited in a bank, can be your family’s income after you are gone.

As for health insurance, it is advisable to get a family floater that covers your spouse and child. If you already have a health cover, then you may want to hike the coverage amount by tweaking the plan suitably.

Create or alter your will to include your child’s name so that your assets can be passed on to him/her without any dispute. You may also want to add your baby’s name as a nominee in your investments, but since he/she will be a minor, you will have to appoint a guardian too.

Factor in the long list of first-year expenses

As soon as the baby arrives, there will be a sharp spike in your expenses. Think regular expenses like diapers, baby toiletries and clothes, and one-time investments like cot, pram, steam sterilizer, car seat and the likes. It will be very tempting to over-indulge in buying new-born things especially if it is your first child, but remember that the baby will outgrow a lot of things very soon. In addition, vaccination visits to any private paediatrician clinic will leave you short of Rs. 5-6k every month. If you are going to hire a live-in help, a nanny or a nurse, then you have to shell out anything between Rs. 15-30k every month as their salary.

Be prepared to budget these expenses in your monthly expenses plan. Segregate these into necessities and optional and see where you can save, instead of splurging on things that your baby won’t need in a year.

Double-income households may have to further prepare to live with single income if the mother takes a career break to take care of the child. This will further increase the financial burden so it may be wise to cut out the frivolous expenses.

Education and after

Getting your child educated in a reputed institution is the most critical step for his/her bright future, but you must know that ‘quality’ education is very expensive. It starts from pre-schooling, schooling to grad and post-grad studies, and expenses will only grow at each different stage. Tuition fees, books and supplies, food and boarding- none of it comes cheap.

Also keep in mind the fact that the value of your Rs. 10 lakh savings today will only reduce over the years, with the rising inflation and cost of living. As per certain statistics, education costs in India are rising by 10% every year. So invest wisely, so that your savings can beat inflation and meet your child’s education goals when required.

And, since we’re Indians, you’ve got to plan for the big fat Indian wedding (maybe destination?) that your child should have. So there’s that, too.

How to invest smartly

Now that you know the upcoming expenses, you need to start saving and investing wisely for the money to grow, and also divide it into the right asset mix (equity, debt, gold etc).

No single investment avenue can meet all the expenditure related to child care. Save for short-term needs (like day-to-day expenses, hobby classes, holiday, laptop, school fees) and keep it in a safe and liquid instrument. Invest for long-term goals (higher education and marriage) in mutual funds, equity or land, so that the value of the money grows over a period of time. Remember, though, to liquidate the long-term investment a year or two before the actual need and shift it to a bank fixed deposit. Equity may help you build the required corpus for the future but they are volatile and subject to market risks. Choose the option that suits your risk appetite and do adequate research to identify winning funds or take expert advice if you don’t understand the financial market.

All this may actually sound daunting to new parents but with planning and thinking ahead, you can enjoy the parenting experience without any concerns. Set your child-plan goals, estimate the current and future costs, start saving and investing now and don’t forget to revisit the plan and corpus created every year. Things can change, so don’t be too rigid in your planning or you’ll end up undoing all the careful work you’re putting into your child’s future.

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