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Financial Planning for the baby(ies)

Updated: Jun 10, 2020

Looking back, I divide my life into two parts: Before Myra and After Myra. As you may have guessed, Myra is my little daughter who changed a lot of things about my life and helped me rediscover the little joys of life (like running around in circles for no reason and singing Baa Baa Black Sheep 50 times a day).

When she was born, I also suddenly became very aware of my mortality. The joy of holding her in my arms also came with a nagging voice at the back of my head which told me that I should try to financially secure her future as much as possible. This article chronicles the approach I took to financially plan for my baby’s future and will hopefully help other parents as they start thinking about these goals.

Step 1: Insurance 

Our babies are dependent on us, and as parents, one of the best things we can do is provide them with adequate insurance in case (God forbid!) something goes wrong. An ideal term insurance policy should be for anywhere between 10x to 20x of the current family income (both your and your spouse’s put together). A plain vanilla term insurance policy works best, and the whole thing can be done seamlessly online.

In case you already have term insurance, you can add your child’s name to the policy as a nominee. Most insurance companies have a time frame within which they need to be notified about a child’s birth (and subsequent addition), so do check with them on this.

On a related note if you have health insurance (either personal or through your employer), do notify the insurance provider about adding the baby to the policy, so that they can extend the coverage.

Step 2 (a): Planning for their basic education -early years

A common refrain that parents have is about how education has become a lot more expensive these days. Not only has the contribution to the “infrastructure fund” significantly gone up but also the annual tuition and related expenses. In addition, a lot of schools want the payment to be made either annually or bi-annually which can be a significant outflow.

If your babies have not started school yet, it is a good idea to start putting away some money for the infrastructure fund. The fund may have various names depending on the school, but the quantum can range anywhere around 1-2 lakhs in a metropolitan city. Since this goal is a short-term goal (1-3 year long), we ideally should not be taking any risk on this corpus.

If you are open to investing in mutual funds, this corpus can be parked in a liquid fund (for payments to be made in 1 year or less) or in an arbitrage fund (for payments due between 1-3 years). The best way would be to invest this money in small amounts (SIPs) into the fund of your choice.

If you are more comfortable with traditional banking options, you could also set up recurring deposits for payments to be made in 1 year or less. For the payments due between 1-3 years, money can be parked in a fixed deposit which matches the expected date of payment.

Step 2 (b): Planning for children’s education – higher education/college

The second part of our planning is around supporting our child’s higher education or college expenses. The cost of higher education has been growing faster than our inflation and hence this goal needs to be more proactively planned. At an inflation rate of 12%, a degree that cost says 10 lakh rupees will cost around 58 lakhs fifteen years from now. What this means is, that the cost of education will go up by 5-6 times of its current cost by the time our babies look to pursue them.

Like all important goals, the earlier we start saving and investing for this- the easier it gets. Since this is a long-term goal (10 years or longer), investing in equity mutual funds is a good idea to manage this. Equity mutual funds tend to provide significantly higher returns over a longer horizon and hence work well for such a goal.

Another good way to create this corpus is to invest in the Sukanya Samriddhi Yojna (SSY) run by the Government of India. SSY is a special investment scheme aimed at helping parents plan for their daughter’s long-term goals. This scheme offers significantly higher returns compared to fixed deposits and has very little risk as it is backed by the government. The account can be opened anytime between the birth of a girl child and the time she attains 10 years ago by the parent/guardian. These accounts can be opened in any post office or most commercial (both public and private) banks.

Step 3: Planning for goals beyond education for your child

Like the goal we planned above, there could be other long-term goals and the same recommendations hold true here as well. It is ideal to invest in an equity mutual fund for the long term to build a corpus that could meet other requirements that might come up.

These were the key goals that as a parent, I think are important for us to plan for. There may be many more goals that we may have as parents, and the thumb rules indicated above stand true for those as well.

Planning for future goals comes down to 3 things: What do we need the money for? When and how much (ballpark estimate)? Once we have clarity on these things, the rest is simpler. They say good luck is when opportunity meets preparedness, and as parents, the best we can hope to achieve is preparing our children for the future. 

Sweta Pachlangiya is an IIM-A graduate who has spent a decade working in finance and strategy. She is also a working mother to a 2-year-old, who has taught her a lot more. She loves talking about money and planning ahead (Marwari genes at play), is also an avid reader.

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