However, many people do not practice this financial discipline. "A lot of people after becoming fathers don't think about reworking their financial plans, which is one of the worst financial mistakes," says Vivek Banka, Co-founder of Goalteller, a financial planning tool.
Budgeting for a Growing Family
While welcoming a new family member, you should alter your budget to account for higher expenses, build savings for future requirements, and prioritize necessary spending. "It's important to increase the emergency fund to cover any additional costs, ensuring financial resilience and security for your growing family," says Krishan Mishra, CEO of FPSB India, the local branch of the US-based Financial Planning Standards Board Ltd.
For instance, Rahul Rai from Kolkata, who is 43 years old and a father of 10-month-old son Akash Rai, wants to create a foolproof financial strategy from the start. He believes that an early start will make all the difference in achieving his son's educational goals. For example, he examines every expense and determines where he can reduce back. He has also chosen to increase his present emergency corpus.
"Ideally, it should cover 6-12 months of living expenses to tide over unforeseen situations," says Nehal Mota, Co-Founder and CEO of Finnovate, a comprehensive financial planning and asset advisory platform. Emergency fund investments should be liquid or very liquidatable. Rahul has already implemented a systematic investment plan (SIP) for mutual funds and insurance-cum-investment vehicles. "This ensures consistent saving and helps you avoid the temptation to splurge," Mota advises.
"A check on discretionary spending and any form of additional savings could be routed towards the goal of securing the financial future of your newborn," says Mayank Bhatnagar, Co-founder and COO of FinEdge, an investment platform.
Investment Strategy for a Child's Future
As previously said, Rahul has been unwavering in his commitment to his child's scholarship adventure, whether in India or overseas. "Raising a child today is expensive with rising education costs," he claims. However, the goal can be attained by developing and strictly adhering to a financial plan.
Rahul began building an investment portfolio shortly after his marriage. His current interests include mutual funds, direct stock investments, fixed deposits, sovereign gold bonds (SGBs), and real estate investment trusts (REITs).
"It is important to create an education fund for your newborn as planning early for the education will go a long way to achieving this goal," Bhatnagar states.
A back-of-the-envelope estimate shows that a SIP of Rs 15,000 connected to your child's schooling aim may possibly generate a corpus of almost Rs 1.25 crore over 18 years (assuming a 13 percent annualized return in an equities fund).
Use Your Finances Carefully
To construct an investing portfolio for his child, a parent should pursue a diversified strategy that emphasizes long-term growth."Equities and fixed income are great asset classes with the tilt towards equity as over long periods equities would provide the best returns," Banka states.
Mishra suggests investing in choices like the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana. The latter is only intended for girls. PPF and SSY offer tax breaks that are intended to assist develop a corpus over time.
Zaveri has already planned to start a PPF account for his baby and would invest Rs 50,000 per year when he turns one in August. This contribution is intended to support his son's higher education goals. He also intends to invest in SGBs and diversify his financial portfolio to help his son achieve his educational goals.
"Investing in gold provides some hedge against inflation but shouldn't be the primary investment," Mota cautions.
Then there are additional popular but unsuitable instruments to avoid. For example, Zaveri has bought a 10-year traditional endowment policy with a monthly premium of Rs 2,500.
However, as Bhatnagar points out, "Insurance as a form of investment to secure your child's future should be avoided at all costs."
With a long-term payout of 5-6 percent, insurance is a suboptimal vehicle for attaining these objectives, he argues. Over the course of 15 years, the difference between a 13 percent annualized return in an equities fund and a 5 percent annualized return in an insurance policy can be significant. Taking educated risks is crucial for investment success.
Get Adequate Life and Health Insurance
With the birth of a child, purchasing a term insurance policy should be your first concern to protect your family. "Review and potentially increase the term insurance coverage by 50 percent to 100 percent of your existing cover or buy a new policy and ensure that family is financially secure even if you are not around," Mota advises.
Shah already has a term insurance policy of Rs 1 crore and intends to get a new term policy of Rs 50 lakh in the near future. Zaveri, on the other hand, does not have a term insurance plan, but he is aware of the need of having a life insurance policy in place and has begun inquiring with insurance firms about obtaining one.
Check your health insurance coverage to guarantee that your newborn is also covered. "Considering the birth of a child, it is critical that the cover value of the family floater is increased," Bhatnagar states. Shah holds a separate health insurance coverage of Rs 10 lakhs. However, he is now going to purchase a family floater plan that would cover both his child and his spouse. He has opted to purchase a bigger coverage of Rs 20 lakh, which is necessary for the family.
Have a Will in Place
A will is a legal instrument that protects your family's future in the event of an untimely death. It will prevent any fraudulent claims against your assets and ensure that your spouse and child have a stable future.
"An individual who passes away without writing a will is considered to have died intestate and assets of the deceased in such cases will be distributed in accordance with the decedent's personal laws (which may result in disputes between the deceased's legal heirs) and not as per the wishes of the deceased," states Anuradha Shah, Chief Executive Officer and Managing Director of War Fiduciary Services, Inc.
