The effects of the pandemic have been cruel – families have been torn apart, businesses have shut down, and people have lost their jobs. Through this all, the pandemic has been an excellent teacher – it made us realize the importance of financial planning. People who had no savings during this time, had to struggle to meet their daily needs or urgent medical expenses.
Living with so much uncertainty has made many parents wonder – are they doing enough to secure the financial future of their children? It’s important now more than ever to have a good financial plan for your child that covers all aspects, including education and healthcare.
The cost of education is rising, and if rough estimates are to be believed, education inflation in India is about 10% to 12% on an annual basis. Even if you consider a conservative estimate of 6% to 8% inflation, it has the power to impact your financial stability significantly. This means saving for your child’s future is no longer a decision you can procrastinate. Starting to save early can help you accumulate large sums of money over a period of time that may not be possible later in life.
Why Is It Important To Save For Your Children?
Due to the rising costs, it is important to save for your child to ensure that:
- They are protected from any financial disasters or emergencies.
- They have a safety blanket to start their adult lives confidently.
- Their expenses, right from education to healthcare is taken care of until they become financially independent.
Plan For The Key Milestones In Your Child’s Life
The important milestones in your child’s life you need to plan and save for include:
- School Education: Your financial plan should take into account the school fees and other expenses associated with school education.
- Higher Education: Higher education in our country or overseas can be quite expensive. Professional courses such as engineering and medicine often have high fees. And if your child is keen on pursuing off-beat careers, such as music or performance arts, they may have to go abroad. As a parent, you should have a financial plan in place to help your child follow their career choices, passions and dreams.
- Marriage: Marriage is an important milestone in a person’s life. If your child decides to get married when they have just started out with their careers, you might have to take care of their marriage expenses.
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Best Saving Plans For The Child
The earlier you invest for your child’s future financial needs, the longer time you’ll have to accumulate enough savings by the time your child is on the career path.
That being said, it’s important to be aware of the best savings plans for your child in India. Here are our top 5 best saving plans for children’s education and marriage:
- Term Insurance Plan: A term insurance plan is one of the most common and best-saving plans that secure your child’s future in the event of your unfortunate death. Upon your death, your child will receive a lump sum amount to help with their future expenses.
- ULIPs: Investing in a ULIP is a smart investment decision because it not only secures your child’s future but the money also grows with time. You may earn rewards for staying invested in ULIP for a longer duration of time. Moreover, you have an option to withdraw money when you need it.
- Chit Fund: A chit fund is a saving tool that allows a specific number of members to contribute a specific amount every month until the term ends. Setting aside a fixed amount and investing it in a chit fund every month for a certain period of time is a great saving decision for your child’s future. Moreover, chit funds allow you the flexibility to borrow money whenever you are in urgent need of funds. Also, chit funds give you a much better return on investment than your regular bank saving accounts or term deposits.
- SIP: SIPs are great investment tools when you are planning for your child’s future goals. For them to be effective, you need to start investing early, in the right mutual fund schemes, and possibly for a longer time horizon.
- Sukanya Samriddhi Yojana: Sukanya Samriddhi Yojana (SSY) is a small savings scheme backed by the government for the benefit of a girl child. It can be opened by the parents of a girl child below age 10 at designated banks or post offices. As the name suggests, this scheme is only for a girl child. It is offered at an interest rate of 8.5%. You also get a tax benefit under Sec 80C of the income tax act
- Recurring Deposits: A recurring deposit is a term deposit that allows you to deposit a fixed amount of money each month and earn interest on it.
- Mutual Funds: Mutual funds are one of the most popular types of asset classes. They are a smart and cost-effective way to invest.
- National Savings Certificate: The National Savings Certificate is a tax-saving investment that carries low-risk and guarantees fixed returns. It can be purchased from any post office.
- PPF: PPF investment has EEE (exempt, exempt, exempt) tax feature. The total amount withdrawn at the end of the term is also tax-free.
- Gold: Gold is one of the safest investments. Historically, it has always recovered its value quickly through economic turmoil..
Selecting The Best Saving Plan For Your Child
The right saving plan for your child depends on your needs and expectations, but here are a few guidelines you can follow:
- Determine your goals and plan in advance: It’s important that you have a fair idea of how much money you should have to cover your child’s education or marriage. Don’t forget to factor in inflation when estimating the required amount.
- Invest in a savings plan that offers good return on investments: Ensure that your savings plan not only helps secure your child’s future goals but also provide you high return on your investment.
- Know what the product is and its associated costs: There may be certain charges associated with investing in a particular type of a savings plan. So, before you invest, make sure you have done your due diligence and compared various products to choose the most suitable one.
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How To Start Saving For Your Child's Future Needs
Here are 4 steps to start saving for your child’s future needs
Evaluate Your Children's Future Needs
The most common reasons you’ll need to save for your child are:
- To cover the increasing cost of education
- To help pursue expensive career options
- To avoid taking an education loan
- To help them with their rising aspirations
- To allow them to explore career or educational opportunities in a foreign country
Whatever is your child’s life goal, make a rough estimate of what the education is likely to cost, take inflation into account and start working towards achieving that financial goal.
Start Early to Save More
The earlier you start saving, the more funds you’ll accumulate. The more you delay, the more costly it will be to save. To understand this better, let’s take an example:
- Child’s Name and Age: Rahul, Age 3 years
- Education Goal: Graduation after 15 years
- Current Cost of Graduation: Rs. 25 Lakh
Assume that the current education inflation is at a conservative rate of 9%. At that rate, the education cost of today is Rs. 25 Lakh and in the next 15 years, it will become almost Rs. 90 Lakh. So, the saving target for the next 15 years is Rs. 90 Lakh. To reach this target, you’ll have to put aside a certain amount each month.
How much amount you need to save to reach your target is given below:
|Invest for 15 Years||Invest for 10 Years||Invest for 5 Years||Invest for 3 Years|
|Save ₹15,000 each month||Save ₹25,000 each month||Save ₹54,000 each month||Save ₹1,10,000 each month|
Note: We have assumed that your investments yield an annualised return of 11% over the saving period.
It is evident from the table above that you'll have to shell out 70% more money if you delay saving for your child's graduation even by five years.
Diversify the Savings
While planning for your child's future, it's important to park the savings in the righdt investment tools. Don't rely on just one investment option; diversify your savings into best savings account for kids as methioned above
Keep Track and Check the Fund Quarterly
After making the investments, it's important to keep track of how they are performing as compared to their peers in the same category. Review the performance quarterly. A better understanding of the performance will help you analyse the situation and decide what changes, if any, to make to your investment portfolio.
Things to Keep in Mind Before Investing
Consider these factors to make an informed investment decision:
- Investment Goal: Your investment goal could be your child's education or marriage. Having a goal helps you decide the amount you need to save and motivates you to keep saving.
- Tenure: Tenure plays a crucial role in generating returns. The longer the investment tenure, the greater will the returns. If the goal is to save for your child's future, you can make small investments for the long term.
- Returns: Predominantly, all investments made for your child's future are for long durations. It's important to invest in a tool that gives significant returns.
- Expenses: Some of the investment plans have certain fees associated with them. Consider investing in tools with lower expenses.
- Risk: All types of investments come with a certain amount of risk because of the market volatility. However, long term investments have the ability to average out on the market volatility. So, ensure you invest for longer terms and gain significant returns.
- Taxation: Different small saving schemes have different taxation rules. Evaluate your investment options and invest in a plan that has less tax outflow.
Secure Your Childs Future Now!
When investing in your child’s future, early planning helps. Before you decide on the right savings plan for your child, consider the safety, returns and tax liability. It’s always wise to follow smart investment tips to build a decent corpus for your child. Don’t wait for your children to start education to solidify a saving plan for their future goals. Start your savings and investments early and enjoy the benefit of compounding, which can prove advantageous in the long run