Financial Planning for Children's needs

Rajendra and Leela have been living happily in their new house for a year now. They are paying their bills on time and have learnt how to manage their money well. To increase their income, Leela decides to convert her hobby of embroidering saris for friends and relatives, into a profession. She receives many orders and gets busy. Whatever she earns is saved for their future needs. They now realise that they are ready to take on the responsibility of becoming parents.

Resources for you and your baby to be

Soon, Leela is expecting a baby. Her husband and family are overjoyed. They start advising her on the do and don’ts of pregnancies. It is then that Prakash, their friend and insurance agent, revisits Rajendra.

“Congratulations, my friend. I have heard the good news,” he says.

“Thank you, Prakash,” replies Rajendra. “Any money related advice for me?”

“Actually, yes,” says Prakash. “It’s more to do with planning for money.”

“Do tell me, my wise friend,” says Rajendra, now very happy that he has taken home insurance.

Prakash tells Rajendra about various costs that he should prepare for, now that he is going to become a father:

Costs during pregnancy: As Rajendra has already begun to realise, his wife needs special care during her pregnancy. She needs more nutritious food and food supplements – iron, calcium, and folic acid. She also needs to be taken for regular check-ups to the doctor.  The doctor also advises a number of routine medical tests to ensure that the mother and baby are fine. Nearer the delivery, Leela registers at a private hospital by paying a deposit.

Cost of delivery and post-delivery care for mother and baby: Like his grandmother, Rajendra would like his wife to have the best care during and after her delivery. He would like the best doctors in the village to help with her delivery and check up his baby. In case, the baby has to be delivered through a caesarean section, it will cost more. As long as they set aside money for these needs, it is possible to give her and the baby the best care.

Cost of vaccinations and baby needs: After baby is born, there are many other expenses – baby’s clothes, toys, medicines, vaccinations and the list can go on. These can be kept to a minimum and purchased/administered at a minimal cost. But if the family wants to, there is no limits to the amount that can be spend on the baby. It all depends on how much you budget for or plan to collect in advance for these items.

Emergency fund: When you have a baby, your whole life changes. The baby’s health and well being become your first priority. Naturally, if anything happens to baby such as an illness or an accident – and these things do happen to most babies – you must have the funds ready to take immediate action towards making baby well as soon as possible. So, collect an emergency fund especially for the baby well in advance. If you are lucky enough not to need it till baby is five years old, you can invest it for use later.

Budgeting for education

A good education costs money. And when your child receives admission to a degree or post graduate degree programme of her choice, you must have the money ready. The secret to having it ready by then is to start collecting it right now.

But how can you estimate how much you will need?

1. First find out the cost of a range of professional courses now – even if your child has not yet secured admission to nursery school. Take an average cost. For simplicity sake, let’s say the cost of an average post graduate degree is Rs. 2 lakh.
2. Then calculate how many years are left before your little one is actually ready to enter such a programme. Coming back to our example, let us assume that your little one is only 3 years old. This means that it will be around 17 years before he is ready to enter such a programme.
3. Now, for each year left before your child will be ready for the course, add an inflation factor. For simplicity sake, let us assume an inflation factor of 5% for our example. As a result, the figure of Rs. 2 lakh will become Rs. 2 lakh 10 thousand by the first year. By the second year it will become Rs. 2,20,500. By the tenth year it will become Rs. 3,25,779. And, by the 17th year the cost of the course will be close to Rs. 4,60,000.
4. That is the figure that you need to aim for with your budgeting and investments.

The figure may seem very large, but you do not have to worry. If you save as little as Rs. 1,000 per month and invest it in a financial product which gives you a return of 8% per annum (without withdrawing the interest that you receive on it), you will collect a sum of over Rs. 4,85,000 over the next 17 years.

This is only an example but the message is that no matter how large the amount seems, investing small amounts at regular intervals will help you collect that amount over a long period of time.

Encouraging children to be financially capable

Rajendra and Leela don’t know how the time has flown by. Their little baby – Preeti - is now a child of 10 years. She goes to the private school in the village and is studying well, under her mother’s guidance. Leela has also matured from a timid housewife to seasoned home manager. She also runs a small but successful embroidered saree sale business from a corner of the family grocery shop. She manages the household expenses efficiently, within the money that her husband gives her. She also saves and invests as well – with advice from their old friend Prakash, who now manages an investment shop, which offers all types of financial products.

She often thinks back on the days when she was young and financially immature. She remembers how electricity bills were often paid late; how her husband and she could not seem to manage within the comfortable stipend that they received from the shop; how she had longed for a trip to the city – to shop for Diwali - but could not afford one.

She is proud that over the years she had learnt how to manage money. She wants her little girl to learn how to manage money from as young an age as possible so that Preeti does not make the same mistakes that she made.

Here are some of the lessons that she teaches her little one:

Learn the value of money

Children could be taught the value of money by allowing them to volunteer for small odd jobs at home for which they can be paid small amounts of money. For example, helping mother to clean and cut vegetables could earn an amount of Rs. 25 per month. Since the child will realise the effort that goes into getting the money, she will think twice before spending it wastefully.

The importance of saving

Teach your child that collecting money has its reward. Instead of spending smaller amounts from time to time, they can collect this money and spend it on an item that will give them more satisfaction. For instance, instead of spending on mithai and snacks, it is possible for them to buy a doll after a few months or even a bicycle a year or two later.

The basics of budgeting

From the time your children can add and subtract, they are able to understand the basics of budgeting. Let them sit around and listen while you and your spouse discuss the family budget. Encourage them to ask questions and make suggestions. Explain to them why some suggestions are workable and why some are not.

Shopping for household items and paying bills

Encourage your children to participate in household chores which include money – for instance paying bills and purchasing small items for you from the store. Teach them the importance of getting the right amount of change

Simple banking transactions

If you have a bank account, you can take the children with you when you deposit and withdraw money. This will make them familiar with the processes involved in banking. Also answer their questions about banking honestly and simply (or get someone to answer them for you if you are not sure). This will ensure that they do not have any misconceptions about it.

Source: Portal Content Team