How Prudent Financial Planning Can Brighten Your Child's Future

Higher education is crucial in empowering your child with the skills to achieve the necessities and comforts of life. The cost of quality education has been rising steadily, making it imperative to plan ahead to ensure that your child has access to the best opportunities. Similarly, weddings are major cultural events, especially in countries like India, where they symbolise not just a union of two individuals but a celebration involving family and friends. Wedding expenses can be substantial, especially considering trends like destination weddings, designer clothing, themed weddings, and more, making it essential to plan for this significant milestone.

In this article, we will explore how prudent financial planning can help achieve these goals through a blend of investment instruments like mutual funds, fixed deposits (FDs), and gold. We will discuss how a well-rounded financial plan can ensure that you are well-prepared to support your child's education and wedding expenses, ultimately contributing to their successful and fulfilling life.

Nowadays, schools and colleges charge very high fees. Moreover, ancillary expenses, such as tuition fees, stationery, uniforms, etc., have increased. Hence, it has become extremely important to plan for your child's entire education to ensure they become successful individuals. Similarly, wedding expenses have surged, including venue costs, attire, catering, and more, making it crucial to plan for this significant milestone.

No matter how old your child is, it is never too early to start planning for their education and wedding. Prudent financial planning is not merely about saving money; it is about making informed decisions that secure a brighter future for your loved ones.

Let's better understand how prudent financial planning can brighten your child's future with a case study of my client - the Kumars. Raj and Priya Kumar are a middle-aged couple living in Mumbai. Raj is an engineer, and Priya is a professor. They have a five-year-old daughter, Ananya. Like many parents, the Kumars have two significant financial goals: ensuring Ananya receives the best possible education and helping her settle down when she decides to marry.

Raj and Priya initially considered investing in various "childcare" investment plans. However, many of these plans turned out to be costly Unit Linked Insurance Plans (ULIPs). ULIPs and endowment plans often don't offer adequate insurance coverage, nor do they generate sufficient returns to counter inflation.

At PersonalFN, we believe in keeping insurance and investments separate. Insurance products like child plans frequently come with higher charges and much higher commissions for the agents who sell them compared to investing directly in various investment avenues, such as shares, mutual funds, bank fixed deposits, Public Provident Fund (PPF), and gold.

Raj and Priya learned that some mutual fund houses have launched products specifically designed to cover childcare expenses. However, they found that most of these "childcare mutual fund schemes" function like regular mutual fund schemes but have different asset allocation patterns. A significant difference between diversified equity-oriented mutual fund schemes and speciality childcare schemes is the "exit load." Many childcare schemes come with a high exit load to discourage early redemption by parents.

PersonalFN's view is that one must not get carried away by the name of any investment product or mutual fund. Instead, it is advisable to invest in the right basket of assets and build a strong portfolio to meet your goals.

Here are 6 crucial steps to follow when planning for your child's financial future:

1. Cost of Your Goal: Determining Education and Marriage Expenses

When planning for your child's future, determining the total cost of education and marriage is the first crucial step. I remember asking Kumars to start by asking themselves some key questions about Ananya's education:

Global Exposure vs Local Education: Raj and Priya debated whether they wanted Ananya to have global exposure by studying abroad or to remain closer to home. They considered the quality of schools in India versus those abroad.

Undergraduate and Post-Graduate Plans: They also discussed whether Ananya should pursue both her undergraduate and postgraduate courses abroad or just one of them. This decision would significantly impact the overall cost.

Future Cost Calculation: To get a clear picture of the total expense, Raj and Priya needed to determine the likely overall cash outflow in both scenarios and calculate the future cost when Ananya would be attending high school, college, or undertaking postgraduate studies.

Suppose Ananya aims to pursue a course that currently charges Rs 25 lakh. If she attends this course in 12 years, with an 8% annual inflation rate, the fees would rise to approximately Rs 78.73 lakh. If inflation were to increase to 12% annually, the fees would be even higher, at about Rs 95.29 lakh after 12 years. This considerable difference underscores the importance of realistically assuming the inflation factor and starting early with financial planning.

In addition to education, the Kumars wanted to plan for Ananya's wedding. They estimated that a decent wedding currently costs around Rs 10 lakh. With an 8% annual inflation rate, the cost of the wedding in 20 years would be approximately Rs 46.61 lakh. If inflation were to rise to 12% annually, the cost would be significantly higher, at around Rs 96.46 lakh after 20 years.

2. Expect the Unexpected: Accounting for Additional Costs

While planning for your child's education and marriage, it is crucial to expect the unexpected.

When Ananya enters high school, the Kumars anticipate many expenses beyond just school and tuition fees. These additional costs, which may seem small individually, can add up to a significant amount. This becomes even more relevant if Ananya decides to pursue a graduate or postgraduate course overseas.

When your child finally applies to and gets admitted to an international school, you might find a number of additional costs you hadn't initially considered. These can include flight tickets, food and accommodation, pocket money, insurance, and more.

Such additional expenses can quickly add up but are manageable with proper planning. Raj and Priya spoke to the parents of alumni and the alumni themselves to understand the total cash outflow for the duration of similar courses. This research gave them a clearer idea of the potential expenditure they needed to plan for.

Despite careful forecasting and planning for these expenses, Raj and Priya prudently decided to keep some buffer money aside for unforeseen costs. This financial cushion ensures they are prepared for any unexpected expenses that might arise during Ananya's education.

Similarly, while planning for Ananya's wedding, Raj and Priya accounted for potential unexpected expenses. Weddings often come with surprise costs that can strain even the best-laid financial plans. These could include last-minute additional guests or unplanned events, price increases of the venue, catering, other services, and so on. Therefore, it is wise to have funds set aside for any last-minute emergencies or changes.

Raj and Priya set aside a portion of their savings as an emergency fund for Ananya's wedding. This buffer ensured that they could handle any surprise expenses without compromising the quality of the wedding or their financial stability.

By planning for the unexpected, the Kumars made sure they were financially prepared for any additional costs that might arise during Ananya's education and wedding. This approach highlights the importance of comprehensive planning and maintaining a financial cushion to achieve your goals smoothly and confidently.

3. Assess Existing Assets: Leveraging Your Current Portfolio

Before you start saving for your child's education and wedding, it is crucial to assess the investments you already have that can be mapped to these particular goals. This step is essential to avoid duplicating efforts and to make the most of existing resources.

Raj and Priya wanted to avoid any kind of strain. Therefore, they carefully analysed their existing investments to see what could be reallocated to Ananya's education fund. Similarly, for Ananya's wedding, the Kumars looked into their existing assets. They understood that dipping into investments made for other financial goals, especially retirement, should be avoided. They also ensured that investments meant for Ananya's education were not used for her wedding, as education was their top priority.

They discovered several investments that could be repurposed:

Public Provident Fund (PPF): They had been contributing to Ananya's PPF account for years.

Equity Mutual Funds: Some of their equity mutual funds had performed well and had been initially intended for long-term goals.

Fixed Deposits: They had fixed deposits maturing at a time that coincided with Ananya's anticipated college start date.

Gold Investments: Over the years, they had accumulated gold, which could be sold or pledged for Ananya's wedding.

Real Estate: They owned a piece of land that could either be sold or used as collateral for a loan if needed.

By assessing the current value of these investments, Raj and Priya could determine how much more they needed to invest. This careful review helped them avoid over-investing and allowed them to allocate resources efficiently.

This approach allowed Raj and Priya to stay on track with their broader financial goals while preparing for Ananya's education and wedding. It emphasises the importance of evaluating your current portfolio and strategically allocating resources, ensuring you do not jeopardise your financial stability or other critical goals.

4. Invest Smartly: Strategies for Meeting Education and Marriage Goals

When planning for your child's education and marriage, it is not just about saving money but also investing wisely to achieve your financial goals.

Raj and Priya's first step was to review their existing investments and savings to see how much they could allocate towards Ananya's higher education. They realised that while they had some savings, they needed to make more significant and regular investments to fill the gap between their current resources and the total amount needed for Ananya's education.

Raj and Priya knew that a high monthly investment might not be feasible for them, so they had to find a balance between saving more and investing smartly. Planning for Ananya's wedding involved similar strategies but with a longer time horizon. Raj and Priya needed to build a corpus to cover future wedding expenses, which required a thoughtful approach to both saving and investing.

Hence, Raj and Priya decided to take the following steps to invest smartly in Ananya's education:

Increase Savings: They began by reviewing their household expenses and cutting unnecessary costs. They cancelled unused subscriptions, reduced dining out, and found ways to lower their utility bills. They also considered finding additional sources of income, such as freelance work or part-time jobs.

Smart Investments: Raj and Priya understood that saving alone wouldn't be enough to meet their goals, especially with inflation eroding the value of money over time. They chose to invest their savings in a mix of investment avenues to achieve the best possible returns:

Mutual Funds: They invested in equity mutual funds through a Systematic Investment Plan (SIP). Equity funds, with an average return of around 12% annually, helped them grow their wealth faster than traditional savings accounts. They invested a portion of the wedding fund in diversified equity mutual funds, which provided higher returns to combat long-term inflation.

Fixed Deposits (FDs): For stability, they allocated a portion of their savings to FDs, which provided a guaranteed return and helped balance the risk of their investment portfolio.

Gold and Gold ETFs: Recognising gold's role as both an investment and a cultural asset, Raj and Priya continued to invest in gold and gold ETFs as a way to diversify their portfolio. Gold historically retains its value and serves as a hedge against inflation.

Savings Discipline: Raj and Priya set up a separate savings account specifically for Ananya's wedding. They made regular contributions to this account and adjusted their household budget to prioritise this goal.

By combining these investment strategies, Raj and Priya aimed to achieve a growth rate that would keep up with or exceed inflation, thereby ensuring they would have the funds needed for Ananya's education and wedding.

5. Cover Your Family with Adequate Insurance:

One of the biggest risks to achieving financial goals is the unexpected loss of income due to unforeseen events like death or disability. Raj and Priya took the following steps to safeguard their plans for Ananya's education and wedding:

Life Insurance: They ensured they had sufficient life insurance coverage to provide for Ananya's education and other family needs in the event of either of their untimely demise. They opted for term life insurance with a sum assured that was sufficient to cover Ananya's education and other future expenses.

Health Insurance: They also reviewed their health insurance policies to make sure they had adequate coverage for medical emergencies. This included critical illness insurance and coverage for hospitalisation to protect against potential health-related financial burdens.

By investing smartly and securing adequate insurance, the Kumars ensured they could meet both Ananya's education and wedding expenses without undue financial strain. Their approach demonstrates the importance of combining strategic saving with intelligent investing and risk management.

6.Get Started Right Away: The Key to Achieving Education and Marriage Goals

When it comes to planning for your child's education and marriage, the most crucial step is to start early. Delaying your financial planning can significantly impact your ability to meet these important life goals. Here's why early planning is essential for the Kumar family and how Raj and Priya approached this critical aspect of their financial strategy for Ananya's future.

Raj and Priya's Success Story:

Raj and Priya knew from the beginning that to meet Ananya's future educational expenses, they needed to start their financial planning as soon as possible. They began saving and investing for Ananya's education as soon as she was born. They set up a disciplined monthly investment plan, choosing a mix of mutual funds, fixed deposits, and gold ETFs.

This approach allowed them to benefit from compounding returns and effectively manage future education and wedding expenses. Starting early gave them the time needed to grow their investments and meet their financial goals without stress. This long-term approach allowed them to build a substantial corpus and manage inflation effectively.

Raj and Priya Kumar's approach to starting their financial planning early helped them achieve their goals for Ananya's education and marriage. By beginning their investments at the right time, they managed to:

Build a Strong Financial Foundation: They accumulated a sufficient corpus for Ananya's education and marriage, avoiding the need for high monthly contributions or loans.

Harness the Power of Compounding: Their long-term investments grew significantly, thanks to the benefits of compound interest.

Prepare for Inflation: Their early planning allowed them to account for inflation, ensuring their savings would cover future costs.

Avoid Financial Stress: Early planning helped them avoid last-minute financial stress. When you start early, you have more time to adjust your savings and investment strategies as needed.

To conclude:

Prudent financial planning is essential for fulfilling your children's future needs and dreams without compromising your own financial stability. Start by evaluating your children's long-term goals, such as higher education abroad or a significant event like a wedding. Forecast these future expenses with inflation in mind, and begin saving and investing early to build a sufficient corpus.

Your investment decisions should align with your risk tolerance and financial situation, and it's crucial to avoid using funds meant for other priorities, such as retirement or medical expenses. Instead of being swayed by the names of financial products, focus on their characteristics and suitability for your goals.

Maintaining adequate insurance coverage will also safeguard your plans against unforeseen events. With careful planning and expert guidance, you can achieve your children's ambitions while ensuring your own financial security.

PersonalFN believes that sound financial planning and strategic asset allocation can help you balance both your children's dreams and your personal needs.

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Hiral Bhuta is a Investment Consultant & Principal Officer. She is a seasoned professional in the financial services industry, currently serving as an Investment Advisor and Financial Planner at PersonalFN. With her expertise, she plays a pivotal role as the Principal Officer appointed under SEBI's amended IA Regulation. Hiral holds distinguished certifications such as Certified Financial Planner (CFP) and NISM XA & XB, complemented by a post-graduate degree in commerce (M. Com). Her primary areas of focus encompass financial planning, investment advisory, and wealth management, where she leverages her knowledge and skills to provide tailored solutions to clients. With a cumulative experience spanning five years, Hiral brings a wealth of expertise and insight to her role at PersonalFN, ensuring clients receive expert guidance and support in navigating their financial goals.
 

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This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.