Every year on November 14, India celebrates Children's Day, emphasizing the importance of nurturing and safeguarding the future of its youth. Among the greatest gifts for children is the assurance of financial stability, especially through good education and a well-prepared plan that supports their needs until they attain financial independence. Securing a child’s future does not mean meeting immediate requirements; It also means establishing a solid financial foundation that supports their aspirations to achieve your goals in life.
Developing a financial plan for children is crucial because it ensures their long-term welfare, particularly when educational expenses are on the rise. Children's Day is a call to action, making parents realize that they should prioritize financial planning for their children. Here are key aspects that parents must consider.
Early exposure to money concepts helps children develop financial literacy. Understanding basic financial principles, such as saving, budgeting, and investing, lays the foundation for making informed decisions in adulthood. Teaching children about money encourages a sense of responsibility. When they participate in budgeting their allowances or savings, they learn the consequences of their financial decisions. Whether you're saving for a toy, a gadget, or an education, setting goals teaches patience, discipline, and the value of money. Don't leave them alone to handle investments, sit with them and help them understand to enhance their financial knowledge.
This is the first step into the world of financial journey. A savings account is your initial introduction to banking and the concept of saving money for your children's future. Developing the habit of saving and encouraging responsible financial behavior in children. By having their own account, children learn the basics of money management, understanding transactions, and the importance of allocating money for different purposes, such as education, future aspirations, or unexpected needs. To start your investment journey, you can introduce your kids to products like FD (Fixed Deposits) and RD (Recurring Deposits). This can help you cover initial expenses for medicines, primary education, clothing, and other small expenses. You can later introduce them to other mutual fund plans and plans.
Begin by estimating future educational expenses, considering factors like tuition fees, accommodation, and ancillary costs. Create a dedicated savings fund, such as a fixed deposit or Systematic Investment Plan (SIP), to ensure a disciplined approach to saving. Availing of specific savings schemes like the Public Provident Fund (PPF), which offers a return of 7.1%, and the Sukanya Samriddhi Yojana (8%), can offer tax benefits and tailored features along with risk-free returns. Customize your savings based on your goals. You can choose fixed-return products with an investment goal of less than 3 years, and beyond this term, you can choose equity-linked schemes.
The cost of education is rising, especially higher education becoming more expensive, especially when you choose technical courses for your children. Within India and abroad, the cost may vary depending on the educational institution, course, country and other factors.
Start planning for your child's higher education as early as possible. It gives you ample time to grow your wealth and helps you achieve your financial goals by investing small amounts of money regularly. Consider factors such as the current cost of education, inflation rate, age of the child, age of admission, expected returns, etc. This will help you reach your target amount and since this is a long-term goal, you can allocate your money to equity-based investment options to earn higher returns.
Equity mutual fund deposits stand out as the best option for children. This preference is attributed to two primary factors: the extended time horizon of 10 to 15 years and the available investment pattern. Equity funds have consistently shown a track record of annual returns in the range of 12% to 15%. This can be useful if you are planning higher education for your children or their marriage etc.
Understand the power of compounding
When you invest in any financial product for your children, you need to understand the return structure and how much it will generate to meet your children's financial needs.
For example, you invest Rs 10,000 a month in an investment plan that gives you a 12% return for 10 years, making your initial investment Rs 12 lakh. After 10 years with the promised rate of return, you will have an amount of Rs 23.23 lakh. Now, if you ran this investment for 20 years instead of 10 years, how much do you think you would accumulate? If you guessed Rs 46.46 lakh, then you are wrong. Thanks to compounding, your 20-year investment would have generated returns of Rs 99.91 lakh. If you stay invested for another 5 years, your returns will double to Rs 1.82 crore, and in another 5 years, they would double to Rs 3.52 lakh. That’s the magic of compounding!
This investment approach proves beneficial in managing education expenses, covering children's weddings, and addressing other needs your children may have, while also catering to your own financial needs.
Diversification of Investment
Diversification enhances the potential for returns. Different asset classes have different risk and return profiles. By investing in a range of mutual fund plans, bonds, and other instruments, parents can optimize their portfolio to strike a balance between growth and stability. This is especially relevant to long-term goals such as children's education, where a diversified approach can benefit from a multiplier effect over time. Adjust and diversify your investments according to the age of your children.
Investing for Saving Tax
When saving for your children, an important factor to consider is tax savings. Tax planning and investment planning go hand in hand. Taxes affect your investment performance, and a good investment plan takes that into account. In addition, not all investment returns are taxed equally: some attract higher taxes than others, while others attract no taxes at all. Your income level also determines the tax you pay, and higher income results in higher tax. Tax deductions help reduce your total taxable income, which also reduces your tax liability. Therefore, tax saving investments not only deal with tax savings but also with investment. You can opt for government schemes like PPF or put your money in tax-saving mutual funds which come with a tax-saving lock-in period. There are several tax deductions available under income tax laws.
Protecting Life and Health
Your entire efforts to grow your investment may go in vain if you fail to provide health and life coverage for your family. An emergency can destroy all wealth, and this is what we have already seen during the Covid-19 crisis. Life insurance is your family's shield and will help them achieve their goals when you are not there. However, calculating the right amount of life insurance coverage can be difficult. Some factors to consider when evaluating your insurance needs are your age, current income, family goals, including your children's education, the income needs of your dependents, inflation, and your current assets and liabilities.
Like life insurance, health insurance is also essential for your family, including the financial well-being of your children. Many factors, such as your family's medical history, previous hospitalization costs, medical inflation, and your city of residence, play a role when determining the optimal amount of health insurance coverage. As a rule of thumb, you could begin with health coverage that represents at least 50% or more of your annual income.
Emergency funds play a crucial role in safeguarding your family in times of crisis. These funds act as a financial cushion, providing a safety net that can be tapped into when unforeseen circumstances arise.
Emergencies could include job loss, medical expenses, or any unexpected financial strain. If a crisis occurs, having an emergency fund ensures that your child's education is not compromised. This money can cover tuition fees, learning materials and other essential expenses, avoiding interruption to your academic journey. Without this fund, families may have to compromise on quality education due to financial constraints. You should have at least 6 to 12 months of your monthly income in emergency funds, and the size of these funds can also vary depending on your income and financial needs. Put this money into schemes that can be easily liquidated when you need funds.
It is recommended that you customize your children's financial journey based on their age, your income, future financial needs, inflation, tax obligations and emergencies. This will help you not only grow your investments but also protect your children and family from uncertainties.
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