When a child is born, literally everything changes. A third person enters the family creating a quantum shift in priorities. You can forget the parties and the movies and the late dinners on weekends. Instead, you need to start thinking about stuff like new clothes for the baby, a new room for the house and most importantly, a new financial plan. You don’t want to wake up one day and exclaim: “Oh no, how can I pay for my child’s college education?”
This article will help you create a financial plan for your family by trying to accommodate the needs and goals of your young child.
- Shift in priorities
After your child is born, two things happen. Expenses start to increase and your income remains the same (unless you get a bonus). You have to buy things like food, medicines, clothes, toys and all the other stuff that a child requires. And that’s only the beginning. This means your original financial plan goes straight out of the window as your savings become smaller and smaller. The best thing you can do at this point is to sit down and create a new investment plan.
- Start early
As your investment goals change, you need to reconsider your portfolio accordingly. For instance, consider a new goal like your child’s college education. It might be a long time away but you need to start investing right away. This is for two reasons:
- Inflation: Assuming an inflation rate of 10%, an engineering course that costs around Rs 8 lakh today will push you back by Rs 30 lakh in another fifteen years time.
- Long-time horizon
Agreed, college fees can be costly. But that shouldn’t stop your child from getting the best education possible. If you start investing early, you can build up the required amount. This may not be possible later in life.
For example, imagine that you are targeting a corpus of Rs 25 lakh in fifteen years. Let the average rate of return be 12.5%. Now, you only need to save Rs 5,000 per month if you start right away. Six years down the line, you will have to save at least double the amount to reach the same goal. This can be quite a daunting task. As the saying goes: Start early, drive slowly, reach safely.
- Investment strategy
Your investment strategy needs to change and evolve as your child grows. For long-term goals like education or marriage, it is best to park a major portion of your investments in equity funds. On the other hand, you might want to lower the risk for short and mid-term goals. Consider investing half of the funds in equity and the other half in debt instruments. In addition, look out for balanced funds at this stage as they consist of a mix of both stocks and bonds.
- Gold to hedge against potential losses
Investing in gold is another good way to protect your investments against potential losses during volatility in the equity markets. In the past ten years, gold has offered very steady returns to investors. However, instead of investing directly in gold, consider investing through ETFs, gold mutual funds or E-Gold. This way, you can benefit from price rise without worrying about storage facilities for the metal.
Having a child increases the responsibility on an investor’s shoulders. For this reason, it is necessary to re-evaluate your risk appetite and create an investment strategy that keeps focusing on these changing goals.