Financial goal: How to plan your newborn’s future over the years
There is a very important financial goal that one must keep in mind and usually people do. But often the journey begins with the day when you have a newborn in your life. In fact, if you follow the right path of financial planning, the planning even for this stage goes way before the birth of the newborn. Let us just dissect the amount of expenses we are talking about for the journey that begins with birth
So, coming to the cost that you incur immediately when you have your newborn, the first thing is bringing the child home. Here is a new human in your life who needs sustenance, who needs to thrive. All the resources that you had, you are going to be sharing with your child as well and you are also going to need additional resources for the care and for this child to thrive.
So, the number one thing we are looking at here is the cost of food. A lot of mothers breastfeed their child, but there are also a large number of mothers who choose to go back to work pretty early on or may not be able to breastfeed their child. In this case, a huge cost of food comes up, like tins of top feed that the child needs, cost nothing less than Rs 4,000 to Rs 5,000 per month. So, being able to budget for this food cost is very important.
Additionally, clothing and shoes and even diapers are all recurring costs because in the initial years, the child is growing very fast and tends to grow out of clothes and shoes very quickly. It is very important to keep up with that.
When you talk about recurring visits to the hospital, that is also another thing that you incur in the first six to eight months of having your child because every month you are making a visit to the doctor, you need to get the baby’s weight checked, get the vaccinations done. All these costs start to pile up and they are all recurring in nature. When you think of these recurring costs, it is important you budget for them in your income.
How do you budget it and start planning for these kinds of recurring expenses? Broader goals, everyone plans, but how can we plan for these kinds of day to day expenses?
The first step that you need to do here is to try and pre-empt as many expenses as you can. Now, everything is not predictable, depending on what your values are. So, a lot of parents choose to make do with what they have at home for certain things like, cradling the baby and creating an environment for the baby at home.
There are certain other parents who would want to childproof their house, buy certain types of furniture, have a cradle, buy a carrier, buy a pram. It completely depends on what your values are and what is important to you in terms of the lifestyle you want as a parent, as a new parent that too. I would say the beginning of this whole thing is just before your delivery, a few days before your delivery, if husband and wife can sit down, if the two spouses can sit down and have this conversation around what are all those costs that you are going to incur on a recurring basis.
Apart from that, it is also important that we look at some of the one-time lump sum costs that you are going to incur immediately after the baby’s born. So, for example, buying this furniture for the child, buying a carrier for the child, buying a pram for the child, buying a seat for the child that goes and fits into your car, a baby seat, these are not small costs. These are all in multiples of 1000.
You definitely need to sit down and create a budget for yourself, at least based on whatever you can pre-empt and, of course, there are certain expenses that are going to come up which you never expected. Make sure that you also set aside a fund for some of these unplanned expenses.
So, let us move on and let us also talk about your loan portfolio, which you might really want to get rid of before this major event in your life.
Talking about loans, one of the important things is that this is also a stage where you may be having loans for a home that you are purchasing. So, you may be paying off a home loan EMI, you may have also bought a car and you may be paying off the car loan EMI as well. So, this is a stage in life where there is a possibility that there will be certain loans outstanding which you may not be able to completely wish away after the baby’s born.
I would say that when you look at your income, it is important that you have a plan around how you are going to set aside money for paying off your loan EMIs, making sure these recurring costs of your life are taken care of and at the same time, you are able to set aside something for future you.
One of the first steps that you need to take after the baby is born, is to make sure that you have a term life insurance cover and I would say that this is a very important step because the elephant in the room after this baby is born is what happens in a situation if either parent is not around or if both parents are not around. In this case, it is very important that you have an insurance policy in place that gives you that peace of mind and also ensures that your obligations like these loans, as well as the expenses and future goals of your child can be taken care of via insurance claim.
What are we talking about over here is also that you need to have your short term goals where it could be having your child, first kindergarten or primary school expense that you need to take care of and longer duration goals can be planned on maybe slowly and after doing a bit of research and whenever it suits you. So how do you actually go in for this, keeping in mind a three-year time frame or a four year time frame, how do you decide on the investment instruments for the primary education expenses?
If you look at it, there are three categories of three phases in the child’s life that you want to take care of. So one is your kindergarten and primary school, which is more of a short to medium term horizon that you are looking at. Then you have the long-term horizon where you want to take care of the child’s secondary education; then there is also taking care of the child’s undergrad college education, post grad education and maybe even the child’s marriage for that matter.
So as a priority, if you had to look at your income, you’re paying off your loans first, you are ensuring that the immediate costs are taken care of. Apart from that, you are also setting aside some money for your own retirement, as well as long-term goals for the child that are important to you because this compounding effect that you can leverage in the long term is something that is very, very important. And that should be your priority.
Now, when I say that, think of college education, undergrad, post grad, as well as child’s marriage because these are goals where inflation will also have a compounding effect. So you want to keep up or at least try and beat inflation.
The second thing is, you have enough time horizon to make small investments towards it and get to that number. Coming to the short term goals that you spoke about, for the short term goals, since these are also recurring in nature, your kindergarten is going to be a recurring cost that you have year on year and same with primary school education and your secondary and your middle school education.
Is there a way that you can think about it, in the sense that you can budget for it in your annual income itself? School education, for example, if it is going to cost you two to three lakhs, you need to think of a way in which you can take care of this annual recurring cost by making sure that you set aside money from your annual income.
So one way to look at it is to say that I will start a flexible recurring deposit or a liquid fund or a short duration fund, where I am setting aside these amounts as and when they are available to me because these are flexible contributions that I can make and I can set it aside for a short term.
The other thing is that I budget for it and when the amount is needed, I have it set aside in my savings account.
What also happens is, you have a new one in your life, at the same time, a lot of couples are also growing up in their careers. They have enhanced income and more expenses lined up. How do you dabble between your expenses and your income and your investment during this crucial phase of life?
The first step here is to make sure that you have a financial plan in place. That is absolutely non-negotiable because the moment you have a financial plan, you will be able to understand and identify the goals that are your immediate priority. What is on my list that is urgent as well as important. Those are the ones that give absolute immediate priority to. So even from your income, you will ensure that those immediate expenses and those short term goals are being taken care of.
Now the second bit is stuff that is not very urgent, goals that are not urgent but are equally important. Maybe you want to ensure that the child’s undergrad education at least is taken care of. At the same time, another important goal is your retirement. So for these two, you may want to set aside money, but maybe do smaller sums now and step it up as the goal gets closer because at this stage, you are going to have so many different competing goals. You have your loan EMIs also to think about and you have your immediate expenses to think about. So I would say you need to sit down and create this plan for yourself and then figure out what your top priorities are.
Source- Economictimes
