Becoming a parent is a life-changing event and suddenly, you realize that you are not only responsible for yourself but someone else as well. Along with joy and excitement, this new addition to your family will also bring changes in your finances. In a developing country like India where the cost of living keeps on rising spontaneously, raising a kid and managing finances can be a tough task.
You might have well-prepared yourself for a financially tough situation by calculating and planning on the expenses incurred when your baby is born, but you are sure to face certain challenges. You must have made a note of the basic expenses like diapers, wipes, food supplies, vaccines, etc. and you might feel that you are saving something. However, on a close study of your finances, you find that there have been only expenses but no savings at all after your little bundle of joy has arrived. You might wonder, even after financial planning, how this is happening? This is because you have prepared yourself for the obvious changes but not for those which are unforeseen or unexpected.
After you have entered into this new phase of your life, the expenses can never be planned. You can only make a rough plan about the most expected expenses and a rough estimate of the expenses. However, to be completely calculative and fully prepared for all expenses related to your kids is quite difficult.
The life-cycle of a parent
Life, after you become a parent, is a vicious circle; the responsibilities and duties never tend to finish. Your responsibilities go on increasing with every single day and you need to make proper planning to bear all these responsibilities well off.
Stage #1: Newborn
This stage is just the beginning and you are not much experienced. Despite all the planning, your expenses will always be high during this stage. In addition to the maternity expenses, there are various other expenses associated with this stage. The food supplies of the newborn baby, the diapers, baby clothes, baby nursery, toiletries, vaccines, etc. are quite expensive and could be a reason to hamper your budget.
Stage #2: Infant
This period of your baby includes approximately the initial two years of your baby and there are quite several major expenses during this period. Again, the major items of expenditure during this period would also be the diapers and wipes of your baby. Your little one will be using a huge number of diapers and wipes during this period and these products are expensive.
You will also feel like renovating the nursery of your baby and bringing in new items always. Your baby will slowly start responding towards toys and try to play with them. You would think about purchasing new toys of different varieties for helping your baby feel delighted and also for the improvement in his reflexes. With varieties of toys, clothes, toiletries (skincare products, lotions, soaps, creams, etc.) and accessories available in the market for babies; it is quite obvious for you to feel like purchasing everything for your baby. Here, you need to be careful about your budget and try spending on those items which are essential rather than on unnecessary commodities. Moreover, your baby’s vaccines and health care is another area of expenditure. By now, you must have included your baby into your health insurance plan and must be paying an additional premium for him.
Stage #3: Toddler
Similarly, in this phase, there will be certain expenses associated with toiletries, clothes, food items, etc. In this phase, your child will have to start experiencing the taste of all food items and also eat a healthy and nutritional diet. Apart from the fruits, vegetables which are consumed daily other food products for babies like milk powder, baby food must be procured and these items will add up to your expenses.
Stage #4: School going kids
Now, this is a completely new phase of your child’s life and there are many preparations needed for this phase. Admission into a new school, school uniform, books, notebooks, bag, transportation and many more; the list seems to be endless. All these arrangements will need a lot of effort and money, and these expenses will go on increasing every single day. You need to have a proper plan to meet these expenses once your kid reaches this phase.
Stage #5: Tween
This phase usually starts from 9 years of age to 12 years. During this period, your kid will no longer be considered as a child and he would not be a teenager by then even. In this phase, there would be a lot of behavioural changes in your kid as he will come across many new things around himself. Nowadays, kids come across many expensive items around themselves such as video games, gadgets, etc. through the internet or friends. You must be able to make your kid understand the underlying difference between needs and wants.
Stage #6: Teenager
Now, it is the time for career building, higher education and other growth prospects associated with your child’s life. He will have to opt for the career of his choice and education is expensive today! Apart from that, nowadays teenagers have their own friends circle and have their expenses as well. You need to give pocket-money to your child regularly but it should be within a specific limit.
Stage #7: Young Adults + Single
The responsibilities and duties of parents never tend to finish. Even, when your children have grown up you feel you have certain responsibilities towards them. You save or create funds for their higher education, wedding or plan to gift a house to them in the future. These are big financial goals and you need to plan for this for long.
Stage #8: Married children with grandchildren
Even if your children are married and have their children your responsibilities never tend to cease. There might be instances in which due to any unfortunate incidents, your divorced children might need your financial help. You can even plan to leave a legacy for your grandchildren by purchasing a life insurance policy early in your life which grows as your grandchildren grow.
So, when you are a parent you will have to bear your responsibilities till the end and this entire process needs money for which you have to make proper financial planning.
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Education Inflation in India
In India, the cost of education is increasing at a very rapid speed. Beginning from primary education, secondary education, and then higher education; it has become quite difficult for parents in India to finance the education of their children. On average, the education inflation rate in India on an annual basis is 10% – 12%. For a middle-class Indian parent, making their children educated by sending them to pioneer institutions is becoming a distant dream.
The cost of education in India is mostly affected by certain crucial factors such as tuition fees, accommodation charges, other expenses like transportation, utility, leisure, and recreational activities, etc. According to various surveys, the approximate cost of primary education in India is around Rs. 1, 92,000. For secondary education in a Government school, the approximate cost is Rs. 30,600, for private schools the cost is Rs. 3, 96,000 and is Rs. 1, 80,000 for those children who are studying in boarding schools. Furthermore, the cost of higher technical education is equally high in India and it is estimated and this rising trend in the cost of education is a serious problem for the parents in India.
However, for higher education and further studies, there are alternative options available like education loans which are a great help for a common man. But, an education loan can be only used to fulfil the gap present between the actual requirement and the savings you have made. As a parent, you need to make plans for the education of your child from the beginning itself so that you have a corpus ready by the time your kid needs it.
Education Planning for your Kids in 2020
Let us have a look at the steps involved in planning for the higher education of kids.
Step#1: Make a plan
This is highly essential as the cost of education in India is soaring high. You can select some of the best career options available and estimate their current costs. You can calculate the approximate cost by calculating inflation of around 8%-10%. Now, you will have to start investing for this purpose every month. If you are estimating the cost of some of the very popular technical or even non-technical courses; you can invest at least Rs. 3500-Rs.4000 on an average per month from now onwards. The sooner you make a plan and start saving, the sooner a corpus would be built for your child and would be helpful for your child.
Step#2: Separate investment portfolio for your child’s education
You should create a different portfolio that would be dedicated only to the expenses of the education of your child. Separate investment buckets must be created for those education expenses which can arise either in the short term, medium-term or long term. Your investment portfolio must consist of equity-oriented investments such as equity mutual funds for the long term educational expenses, ULIPs and PPF account which can be used to bear the educational expenses of your child.
Step#3: Insure yourself
You need to insure yourself with a Term Plan until your child’s education is not complete so that your child’s education is not hampered even if you were to meet with an unfortunate death.
Also, you may consider opting for a ULIP(Unit Linked Insurance Plan) in your life with a waiver of premium wherein you can choose your investment portfolio and get mark-to-market returns. A child ULIP gives your insurance coverage for your life along with investment opportunity. The premium waiver benefit comes handy if the policyholder happens to die within the policy, the policy would still continue as per the schedule, the premiums would be waived off and the maturity benefit would be paid to the child if
You can consider investing in child ULIPs which has the feature of waiver of premium so that your child will obtain the necessary amount at the desired age. If you are interested to obtain maximum benefits in the long-term then the most preferable option is the Equity fund option. Child ULIPs will give a lump sum amount to your child in case of your demise and the company keeps on continuing the investment on behalf of the policyholder. Moreover, you should also ensure that you have a pure term insurance plan so that your child’s education is not hampered in case of any unfortunate event.
4. Mutual Funds
You can initiate the savings plan for the higher education of your child by purchasing SIP in a 2-4 equity-oriented mutual fund scheme which has an amalgamation of mid-cap and large-cap funds. You can keep on adding additional money received as gifts by your child. Also, investing through ELSS (Equity Linked Savings Scheme) is another good option as it helps in saving tax too. Suppose, your child needs the money for the educational goal in 3 years-5 years then you can opt for SIPs in balanced funds and if the requirement is far off then investment into SIPs in mid-cap and large equity funds are appropriate.
You can also start the investment for your child’s higher education by opening a PPF Account (Public Provident Fund) Account in the name of your child. The PPF scheme is for 15 years and would help in creating a corpus for your child’s higher education. Moreover, PPF investment is a tax-free investment strategy and you can withdraw money from the account in the seventh year depending on the requirements of your child. You can even extend the account once your child is above 18 years of age and starts contributing to the PPF account.
6. Gold ETFs
Gold ETFs stand for Gold Exchange Traded Funds. These are the units of Mutual Funds and each unit is equivalent to one gram of gold. These are also known as paper gold and the buying, selling procedure is the same as that of any mutual funds through a demat account. Better liquidity is offered by Gold ETFs and these Gold ETFs will take care of problems like high making charges, purity problems, and safekeeping.
7. Stocks and ETFs
Stocks give high returns over a longer duration of time but have risk factors associated with them. ETFs hold various assets like stocks, commodities or bonds which are closer to their Net Set Value. These are highly transparent and cost-effective investments.
Keeping kids expenses separate
Another method of managing finances for your kids is by keeping the expenses of your kids separate. This can be done by opening a separate joint account for your child and keeping his expenses different from the rest of your expenses. Usually, joint accounts are meant for those persons who will be similarly spending money and will have the same goal to meet.
By opening a joint account for the expenses of your child, you will be able to have the below-mentioned advantages.
- It will be easier for both the parents to pay the fees and for the other academic expenses of the child.
- If you and your spouse both are working and contribute towards the child’s expenses; then you and your spouse can deposit your share into the joint account for your child’s expenses. This avoids the cumbersome procedure of sending money to each other for your kid’s expenses.
- It can be ensured that the money which you both are contributing to the kid’s expenses is not being used for any other purpose.
- Any withdrawal or transaction is done, both the parents will be aware of it and then there are no hidden secrets related to the money. So, you would not be encountering any surprises related to the money in the future.
- Moreover, if there is a separate account made for your child’s expenditure then you can make some adjustments into your household budget for saving some money and it will not affect your kid.
Hence, after you have become a parent your entire world revolves around your children, their secured future and well-being. With the cost of living and the cost of education soaring high, it has become necessary to manage your finances judiciously after your children are born. Many people even start the saving process before the birth of their children. When you are creating separate accounts, separate savings funds or investment buckets for your children you should never use it for any other purposes or expenses. Even if there is some very urgent situation, you might drop your basic savings plan for the month; but you should never mess up with the money or fund you have created for the future of your children.