Benefits of Early Financial Planning for Your Children

 

Introduction

 
As a parent, you always try to provide your little one with the best of education, comfort and other facilities. However, as your child grows, the expenses towards their education and other needs also continue to rise. Along with inflation, major expenses like their higher education or wedding can impact your financial goals. Therefore, it is necessary to safeguard your child's future financially through prudent financial planning.
 
The earlier you start your financial planning the better will be your returns. Proper financial planning also helps you navigate through the uncertainties of life.
 
It is tough to gauge your child's interest at an early age and given the increasing cost of pursuing higher education, delaying on a financial plan can be dangerous. Here are three reasons:
 

Why you need to develop a money saving plan for children?

 

• Clear financial objective

  You invest systematically with a clear financial goal, through which you can allocate funds towards its accomplishment. 
   

• Full financial support for your child's future

  A financial plan helps to accumulate wealth over a period of time for higher education and other financial needs. It also takes inflation factor into account, which is the reason behind the increasing cost of quality education.
   

• Reduced risk

  Having a financial plan ensures reduced risks from uncertainties and your child's dreams are protected even when you are not around. 

A well laid-out financial plan to secure your child's future is the first step towards the fulfilment of your child's dream. Some of the key benefits of financial planning are:
 

Benefits of financial planning

 

1. Build wealth over time

   Starting out early helps to spread your investment journey over a long period and make necessary adjustments to adapt to the dynamic environment. It also helps to put in place a realistic plan which ensures, you never fall short of funds without compromising on your standard of living.
    

2. Save less in future

   One of the major benefits of starting out early on a financial plan is you have to save less in the future years. The compounding interest factor will help you to earn more in the long run. This helps you to save optimally and allocate your savings to other financial goals.
    

3. Increased financial flexibility

   One of the major benefits of financial planning for children is to make the most out of your limited financial resources and realise increased financial flexibility.
   In personal finance, financial flexibility means the ability to quickly access new sources of finance to meet the needs that arise suddenly. In other words, financial flexibility is the measure of an individual's ability to meet all the needs without impacting the financial security. It is the key to financial independence.
   
   Some of the benefits of increased financial flexibility are:
   • Quick response to any kind of financial situation
   • Future stability and growth
   • Efficient decision-making process
   • Greater focus on your goals
   • Disciplined life and far less financial volatility
    

Therefore, when it comes to financial planning for children, you should not delay it, as it directly impacts your financial flexibility.
 

How to plan?

For creating a money saving plan for children, you need to get together the resources and make a financial plan based on aspirations and goals.
 

1. Set targets

   You need to identify your child's potential and set a specific financial goal accordingly that needs to be achieved within a period. This should include costs linked to higher education, other related costs like coaching for competitive exams, books, laptop, etc.
   
   While calculating the corpus amount, that is to be required after 15 to 18 years, keep the inflation factor in mind. Also, review the target amount every five years to check, whether it matches your child's aspiration and goals.
   
   As a parent, you also need to consider the amount of savings you are willing to allocate towards securing your child's future plan.
    

2. Get insurance

   While securing your child's future through a well laid-out financial plan, ensure all the risks are covered through insurance. Taking a term insurance policy or an insurance-linked child plan will ensure your child's future plan stays safe and on course.
   
   For example, a term insurance policy assures a risk coverage of about 12 to 15 times your annual income. This ensures your kid's future plans are not compromised when you are not around. 
   
   Whereas, an insurance-linked child plan comes with multiple benefits like assured pay-out at maturity, fixed policy tenure, premium-waiver benefit in case of death of the insured, partial-withdrawal, flexible periodic premium payment options, etc.
    

3. Open a bank account

   Open a bank account, which should only be used for the purpose related to securing your child’s future. Do not mix it with your other financial goals as it will help you to maintain records and measure the size of your child’s financial plan.
   
   You can also use the bank account for creating an emergency fund to meet any kind of unexpected expenses. It is recommended to have an emergency fund equivalent to 3 to 6 month worth of expenses.
    

4. Provide financial education

   Introducing your kids to financial education is important for securing your child's future. You can gradually introduce your kid to the financial world, rather teaching the complex part of the financial system in one go. Following are the age-appropriate steps you can follow to make your child financially literate
    

   1. Below 10 years of age

      Introduce the concept of a piggy bank and teach them to save money into it. You can also introduce an allowance-based work system to inculcate the habit of ownership of work done.
       

   2. Between 10-18 years of age

      Introduce them to the financial system by opening for them their first bank account. Also, teach them the value of money and why it is necessary for survival.
       

   3. Between 18-24 years of age

      Explain to your child, the importance of financial planning and setting up financial goals. Also, explain debt, savings and investment which help in prudent financial management.
       

Best Investment plan for Child

 

1. Public Provident Fund

   Public Provident Fund (PPF) is a long-term savings scheme offered by the government of India. It is a tax-saving investment option that offers a fixed rate of interest and the maturity period is 15 years. The funds invested in a PPF account can be used for various purposes, such as higher education, marriage expenses of children, and retirement planning. Investing in a PPF account for your child can help secure their financial future by providing them with a corpus of funds that they can use for their education or other expenses. Additionally, the interest earned on a PPF account is tax-free, making it an attractive option for saving for your child's future.
    

2. National Savings Certificate (NSC)

   National Savings Certificate (NSC) is a small savings scheme offered by the government of India through post offices. It is a fixed-income investment with a maturity of 5 or 10 years. The interest rate offered on NSC is fixed and determined by the government. One of the key benefits of investing in NSC is that the interest earned is tax-free under Section 80C of the Income Tax Act. Investing in this scheme for your child's future can help provide a regular income stream and a corpus of funds. Additionally, NSC can also be used as collateral for loans. 
    

3. Unit-linked Insurance Plan

   A Unit-linked Insurance Plan (ULIP) is a type of insurance policy that combines the features of insurance coverage with investment options. It allows policyholders to invest a portion of their premium in various investment options, such as equity, debt, or a combination of both. ULIPs are suitable for long-term savings and can be used to secure your child's future plan. They offer flexibility in terms of investment options and allow policyholders to switch between different funds. Additionally, ULIPs offer tax benefits under Section 80C of the Income Tax Act.
    

4. Equity-linked Savings Scheme (ELSS)

   An Equity-linked Savings Scheme (ELSS) is a type of mutual fund that is eligible for tax benefits under Section 80C of the Income Tax Act. ELSS funds invest primarily in equity shares of companies and have a lock-in period of 3 years. They offer higher returns than traditional fixed deposit options, making them suitable for long-term savings and planning for a child's future. Additionally, ELSS funds diversify investment across various sectors and companies, reducing the risk associated with a single stock. Investing in ELSS funds through a Systematic Investment Plan (SIP) can be a good way to regularly invest small amounts and take advantage of rupee cost averaging. In summary, ELSS funds can be a good option for parents looking to plan and save for their child's future while also taking advantage of tax benefits.
    

5. Bank Fixed Deposit (FD)

   A Bank Fixed Deposit (FD) is a type of savings account offered by financial institutions where the depositor agrees to leave a sum of money for a fixed period. The deposit earns interest at a fixed rate for the duration of the deposit. FDs are considered a safe and secure investment option, making them suitable for long-term savings and planning for a child's future. They are also easy to open and maintain, with a minimum deposit requirement that is often low. FDs can be opened in the name of the child, with the parent as the guardian. 
    

Conclusion

Just like raising your child through good education and values is important, creating a financial plan to secure your child's future is equally important. In the long term, it ensures your child stays on the right path to realise their dreams and have a bright future.
Through early financial planning for children, it helps you to determine the short as well as long term goals and helps you to create a balanced plan to meet those goals. So, be prepared to meet your children’s future needs with a carefully curated financial plan. 
 
Disclaimer: This post was first published in 28^th Feb and has been updated for the latest information, freshness and accuracy.