Bringing a new life into the world brings with it, a lot of responsibilities and financial liabilities. Children can be molded into their best versions through education and it’s one of the biggest cash outflows (not the only one) that a family has to plan for. According to a report by the Hong Kong and Shanghai Banking Corp. Ltd (HSBC), Indian parents spend an average of $18,909 (Rs 12.2 lakh approximately) on their child’s education. The global average is $44,221.
Financial planning for your children’s future is no easy task. Saving and investing in an extemporary manner certainly won’t help. You need to identify the appropriate investment options at the right time to meet the financial goals set for your children. Here are some investment tips to follow for better financial planning for your children.
With early saving and investing, comes the benefit of an extended tenure and the opportunity to earn higher. The best time to start financial planning for your children is when you know you are planning to have a child sometime in the near future. A delayed start can put other financial goals at stake.
If you start early enough, you’ll have the best returns if you invest in long-term risky asset classes such as equities. By doing so, on top of you stockpiling a large sum, the money will gain from the power of compounding. The later you start, the better off you’ll be if you incline your portfolio towards the debt from equity.
Take Inflation into account
Stats reveal that the cost of any professional degree doubles in 6 years. Factoring the rate of inflation in the financial planning for your children is thus essential. Approximately calculating the amount required, taking into account the inflation, and working towards achieving that goal is highly advised. This will help the parents be mentally and financially prepared for the repercussions of inflation in the future.
Opting to invest in a long-term mutual fund is the easiest way to invest in equities systematically, at regular intervals (through SIPs). One key feature of mutual funds is that they automatically correct the amounts in accordance with inflation. Mutual funds are professionally managed, tax-efficient, and also have a provision of working with smaller amounts. They are ideal for saving money for key milestones in your life like your child’s education or marriage. Investing in mutual fund schemes in the name of your child (no age limit) without any restriction on the investment amount can prove highly beneficial in the future.
Insurance Policies that include Partial Withdrawal Plans
You may have invested in different asset classes to achieve good financial planning for your children. It’s equally important to have adequate insurance cover, to tackle unforeseen circumstances and dangers in their lives. While you’re at it, it never hurts to be well prepared for emergencies. Make contingency plans and put together a child education fund that helps you overcome your financial crunches easily. Choose to invest in such funds that at times of emergencies, they come with a provision of partial withdrawal.
One of the most prudent financial instruments in the markets you can opt for is unit-linked insurance plans (ULIPs). They offer the dual advantage of both insurance and investment. ULIPs invest in the market through various funds of varying degrees of risk for long-term wealth creation and Partial withdrawal is among the several advantages offered. It allows you to withdraw money for your needs from the accumulated fund value.
Review your financial plans from time to time
Make it a point to review your financial strategies periodically to ensure better financial planning for your children. By doing so, you’re more likely to account for the factors that may eat at your potential savings in the future otherwise. You can account for an inflation rate change, cost of living change, and much more by reviewing your portfolio from time to time. Also, remember to rebalance your portfolio at the end of each year. Rebalancing essentially boils down to selling an outperforming asset and investing the proceeds in one that is underperforming.
One final piece of advice – five years before your goal, start shifting your money out of equities to the safety of debt.
Financial planning for your children in the future goes far beyond just keeping aside money for their future. It’s important to invest wisely so that you double or even triple the amounts you keep aside for them. Start instilling the habit of saving in your children. Let your kids understand the worth of money so that they start spending wisely from childhood and help them understand the value of hard-earned money.
In the case of poor financial planning for your children or need for more money, you can always go for School FeES – a tuition fee loan provided by EarlySalary designed to ease the burden off parents’ shoulders.
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