Friday, November 4, 2011

Planning For Your Child's Future

The coming of a child in any familly is an occasion of great happiness and rejoice. After the initial euphoria, invariably the thoughts of securing the child's future and providing for the future needs arise. In the hearts & minds of the parents, a lot many dreams and aspirations also start taking shape. These dreams and aspirations perhaps carry the highest priority for any parent.
The above is a common phenomenon for any new parent. Even for existing parents, the growing need for child's future planning is increasingly felt as the child matures. Gone are the days when a parent could relax and think that good upbringing and focus on studies would ensure a good future for the child. The fact is that child planning has become very critical for every parent and it can no longer be ignored or delayed.

Goals for child's future:
  1. Need for strong educational background:
The need for a very strong and quality education is increasingly felt in today's competitive world. With India's burgeoning young population, the excellence in education is a determining factor in the race for better careers today and it will be even more so in future.
However education, especially quality education doesn't come cheap and it is also something that parents hate compromising on. A child's school costs alone have reached sizeable amount. For higher education in reputed institutions can easily cost upwards of Rs.10 lacs in today's value. Similarly education in foreign institutions can easily cost upwards of Rs.20 lacs. Arranging such amounts for education is a big financial goal that needs planning before hand if one wishes to give a good start to the child's future.
  1. Planning for marriage of Child:
In India, marriage is a gala event where money is spent more lavishly. Every parent dreams of organising the ceremony as best as one could provide given the status and social standing of the family. Marriage, especially for girl child is still considered as a big responsibility in many parts of the country where the family often feels obligated to provide for the entire wedding expenses in addition to gifts to the groom's family. With rising prices of gold & jewels and wedding costs, which are increasingly becoming more stylish, the future marriage costs are most likely to be beyond what you plan today. It is thus only logical that parents feel marriage planning for child to be a big financial goal and thus should plan for it today.
  1. Planning for home and/or business capital:
In addition to education and marriage, many parents would also like to provide for a separate homes for their child. There are some distinct reasons behind this like the growing trend of nuclear families, rising prices of real estate and homes becoming smaller to accommodate large families. Parents, especially for the male child, feel the need to have distinct homes that would provide for a great sense of security & a big asset for the child in future. Similarly, there are also parents, especially from the business communities, that may think of planning business capital or seed money for their child own business venture when the right time comes.

Planning for home or business capital for child is one lesser importance than to arrange for education or marriage. Nonetheless, it is something that many parents feel important to provide for and thus requires proper planning by the parents.

One area of that we feel left is that of accomodating for expenses on child's education and upbringing on general terms. One can easily see that after the arrival of child in family, the monthly household expenses easily rise by upto 15-30%. Rise in such regular expenses are in nature of school/college/tuition/hostel fees, pocket money, shopping, gifts & small assets, etc. Though one can plan this as financial goal, often these expenses are adjusted in the normal cash flows of the family.

Nature of the goals for child's future:
The goals related to your child's future are slightly different from the other goals. Let us look at some of the unique features that go along with such goals.
  • Inflation or rate of rise in costs: In goals like education, marriage, etc., one cannot estimate the percentage rise in costs. Neither pure inflation figures can be assumed for such goals. The reason being such expenses are a lot subjective. For eg., while planning for education, one cannot strictly decide upon the nature of course, the institution or the level/years of education today. Further, the rise in prices for such education courses are not driven by inflation but more by the rise in quality of programme, facilities & instructors. Similarly while planning for marriage, one can easily see the sea change in how marriages are being conducted in past and current generation. There is also the angle of rise in social stature which we may not account today. Again inflation is only an indicative figure here and one needs to consider other factors too. 
    Thus, one needs to play very safe while planning for education and marriage. The best thing to do would be to consider the costs of the best education and marraige that can be provided and assume a rate appropriately higher than inflation while planning for such goals.
  • Maturity time: In case of education, the maturity of the gyouoal is generally fixed and one knows that higher education will be pursued after graduation. However, in case of marriage, it again cannot be fixed in advance though a likely marriage age can be fixed. The better idea would be to fix the marriage age on the lower side for planning purpose so that you have the corpus ready should you need it sooner. 
  • Security: Another unique perspective while planning for child' future goals is that of security. By security we mean that the goals of education and marriage need to be secured in the unfortunate event of death or disability of the parent. These goals are such that they are destined to mature, irrespective of anything happens to the parent.

Planning tips:
There are no special tips for child future planning. The tips applicable here are the same one that is universily applicable to all goals and most likely that you would have heard of.
  • Start as early as possible: One may start planning for such goals even if you are not a parent. For existing parents, one strongly advisese to start as early as possible for such goals.
  • Invest in right asset class: We already have talked a lot on the importance of choosing the right asset class according the risk appetite and investment horizon. Equities are the best option for long term goal planning since they are expected to deliver better returns, especially in a growing economy like India.
  • Save Regularly: Making regular savings a habit is probably the best thing of financial prudence. Small regular investments can greatly help for goal planning and is a better option than waiting for big sums of money to be accumulated for investments.
  • Insuring future: A special case for insuring future of the child through products like insurance and other similar products is an important need for child planning.
  • Investment options: There are plenty of investment options available in the markets. The investment options can be pure investment options in different asset classes and can also be in nature of customised products for child goals, as available in insurance products. What is really important for parents is to inquire about the options available in the markets while making the decisions. While selecting any scheme or plan, do not just look at the name which may contain the word 'child' but look at the actual features offered by them.

The main purpose of this article is to highlight the importance of planning for child goals. In an increasingly competitive and uncertain world, as a parent securing the future of child assumes great significance. It is something that should not be delayed and never avoided. The best way to begin is to start assessing the needs and goals for your child's better future today.