How should you plan for your child’s future ?

Traditionally, financial planning used to start after attaining 40s to construct a house and marry the children. However, nowadays financial planning initiates while the child is attending preschool, and the parents are in their 20s or 30s. Considering, the cost of quality education is very expensive and cannot be compromised. Traditional Challenges: Earlier, financial planning for parents meant expenses on children's higher education and arranging their marriage. Modern Challenges: Due to such high inflation levels, the cost of higher studies has touched the sky as such cost of engineering education is 4 lakhs every year. Even, the cost of admission to LKG, and above classes is increasing high. FINANCIAL PLANNING Financial planning for children is divided into two parts as the financial part and behavioural part. 1) Financial Aspect of Finance It includes: • Setting goals based on what is to be done in the future by child • Analyse current cost • Forecast the expected cost in future. • Initiate saving and investing • Adjust more on yearly basis considering situational demands. 2) Behavioural Aspect of Finance Each goal and process of financial aspect has behavioural aspects for the execution of the target plan. Although there are no fixed standards everything depends on certain depending factors. Like to achieve a goal of spending a heavy amount on the child's birthday party includes saving money, sacrificing expenses, considering current income etc. Need for Insurance or Investment plan Therefore, it has become a necessity to select an investment plan or insurance to implement and achieve goals related to children that require financial plans. Importance of sticking to a plan There could be several instances where people do not stick to plans such as: 1) On completion of three or five years of the term, the financial advisor insists on buying a plan in the new company rather than renewing the old one. 2) Market fluctuations forces to buy or sell. The way ahead Through a systematic plan and execution, every parent can do successful financial planning for their children. Options for Investment for Children Some of the insurance companies offer protection plans with certain features to protect children in the absence of parents or spouse. Difference between Savings and Investment Savings are meant for short term like 3 years. It is not made to increase the value of the investment but to have it after a certain period. Whereas, investment leads to an increase in its value and is done for the long term irrespective of market fluctuations. Investment is made for capital appreciation. Factors Determining Investment The major factors that should be considered while investing are: 1. Regular income generated 2. Capital appreciation 3. Fluctuations in the returns 4. Liquidity or marketability 5. Tax implications Difference between Asset, Liability and Expense Asset generates positive cash flow. Liabilities create negative cash flow while expenses take away money. It is important to understand what are liabilities, assets and expenses. Must-Dos Certain important decisions must be taken apart from the above, such as: 1. Life insurance term plan with the highest cover to fulfil children's expenses in future. Term plan should be reviewed every two to three years. The insurance term plan gives income benefit to family members in the absence of earning member. 2. Buy health insurance plan with 5 to 10 lakh coverage, considering the inflation and the high health care cost in future. Don'ts 1. Avoid Public Provident Fund (PPF), endowment type insurance plans and money-back insurance plans because they are savings plans meant for the long term. The returns are lower than inflation and they do not have any liquidity. 2. Do not borrow to invest in a tax savings plan or trading in the stock market (day trading) or borrowing for liability such as a car. Can Dos A few things that we can do for children such as : 1. Presenting house/property instead of gold jewellery. 2. Get a business fund instead of a higher education fund. 3. Buy more of smaller apartments or a commercial building instead of one big house. ULIPs and Children plans Unit Linked Insurance plan (ULIP) consists of: 1) Sum Assured: That is Life Cover or actual insurance. 2) Premium allocation charge: The amount deducted for sum insured. 3)Investment: The remainder of the amount after deducting additional administration charges. Units accrue in account from the investment made by insurance company towards equity market, debt or both. Generally, the insurer pays either the sum assured or the investment amount whichever is higher on the death of the insured. On survival and completion of the entire term, only the investment amount is paid out. However, units can be redeemed anytime. The parents are insured under the child plan, while the child becomes beneficiary. On the death of parents, the plan continues till the end of term and the benefits will continue for the child. There are policies which offer monthly/ yearly allowance while some policies provide a double benefit to the child. And the amount of sum assured is immediately paid upon loss of parents while the pay for the future premiums into the investment account for rest of the term. Children plans are not sufficient to cover all the life insurance needs.