Children’s Day: From SIPs To Insurance - 7 Ways To Secure Their Financial Future

Children’s Day, 14 November: A newborn brings plenty of joy, but also changes the family budget. There are medical bills, childcare expenses and, in a few years, school fees. Further down the road comes higher education and other expenses that can run into several lakhs of rupees.

Many parents start thinking about these expenses only when they draw closer. That can make the financial burden heavier. It is worth putting some money aside from the early years, even if the amount is small to begin with. On Children’s Day, we list seven steps that can help.

1. Start Saving For Education Early

Higher education is likely to be one of the biggest expenses parents will face. A course that costs Rs 25 lakh today could cost much more by the time a newborn is ready for college.

Estimate the likely cost of education after 15-18 years and work backwards to decide how much you need to save every month. Remember to factor in education inflation, particularly if the child may study abroad.

Keep this money separate from regular household savings so that it is not used for other expenses.

2. Start A Mutual Fund SIP

Parents do not have to wait until they have a large sum to invest. A monthly SIP in a diversified equity mutual fund can be a way to build an education corpus over the long term.

For instance, a monthly investment of Rs 5,000 for 18 years could grow to around Rs 30 lakh, assuming an annualised return of 10 per cent. This is only an illustration; mutual fund returns are market-linked and are not guaranteed.

As the education date approaches, gradually move the money into less volatile investments. This will reduce the risk of a market fall just when the funds are needed.

3. Open A Sukanya Samriddhi Account For A Girl Child

“If you are the parent of a girl child, you can consider opening the Sukanya Samriddhi Account (SSA), a government-backed savings scheme, for her. This account can be opened before your child turns 10,” says Abhishek Kumar, SEBI RIA and Founder at SahajMoney.

The scheme offers a government-notified interest rate, tax benefits subject to applicable conditions and a long investment period. Parents can use it to build savings towards their daughter's education and other eligible needs.

However, the scheme has deposit and withdrawal restrictions. It is better to treat it as one part of the investment plan rather than put all the education savings into it.

4. Buy Adequate Term Insurance

Parents spend time deciding how much to invest for their child, but often give less thought to what would happen to those investments if the earning parent were to die.

A term insurance policy can provide the family with money to meet regular expenses, repay outstanding loans and pay for the child's education. The cover should take into account the parent's income, existing liabilities and the family's future financial needs.

Do not decide the sum assured on the basis of the premium alone. Also check your health insurance policy to see when and on what terms the newborn can be added to the family floater.

5. Keep An Emergency Fund

Medical expenses, a job loss or an unexpected financial commitment can upset the family's savings plan. Having an emergency fund helps parents deal with such situations without dipping into the child's education investments.

Try to keep at least six months of essential household expenses in easily accessible savings or other suitable liquid instruments. Families with uncertain incomes may need a larger cushion.

6. Make A Will And Appoint A Guardian

“Making a Will and appointing a guardian is an important part of planning that many young parents tend to put off. A Will should clearly state how assets are to be distributed and who should manage the child's financial interests,” suggests Kumar.

Parents should also consider whom they would want to look after their child if both are no longer around, and make the necessary legal arrangements for guardianship.

Check nominations in bank accounts, mutual funds and insurance policies as well. A nomination can make claims easier, but it does not necessarily settle legal ownership of assets. Take legal advice while preparing the Will.

7. Teach The Child To Handle Money

There is little point in building a sizeable fund for a child if he or she does not know how to manage money later. This is something parents can work on gradually.

They can start by giving their children a little pocket money and allowing them to spend it as they wish.

“If they finish it too soon, resist the temptation to give them more immediately. Let them figure out how to manage with what they have. They will soon learn that money spent today is not available for something they may want tomorrow. When they are older, parents can help them open a bank account, explain how digital payments work, and show them how to keep track of their spending. A basic understanding of saving and investing can come later,” says Kumar.

Keep Your Retirement Savings On Track

While planning for a child's future, parents should not neglect their own retirement. Putting every available rupee into the child's education fund may leave the parents short of money in their later years.

There is always the option of taking an education loan if the need arises. Retirement, however, is harder to finance through borrowing.

Parents should, therefore, decide how much they can comfortably set aside for the child without compromising their own financial needs. Regular investments, adequate insurance and a Will are a good starting point. There is no need to buy multiple child-specific plans simply because they are marketed as solutions for a newborn.