Financial planning for your baby

Neha Sharma left a comment about what factors you should keep in mind while expecting a baby, and I was a bit disappointed to see that there is hardly any good information on this important topic online.

The best article I found was by Hemant on your child’s future plan and I must say that if you are interested in this topic and are pressed for time you should much rather read that article instead of spending more time here.

If you have time to read two posts then here are my thoughts on the financial planning aspects of expecting a baby. I have penned down my thoughts, but I am also unclear about a lot of these aspects, so those of you who have gone through this stage, please share your experience in comments or email and let everyone benefit from them.

Financial Plan NOT Financial Product

The most important thing that I would want to emphasize is that you should distinguish between making a financial plan for your baby and buying a financial product for your baby. A financial plan is not the same as a financial product, and if anything, the insurance products that are meant to be children plans have relatively high costs and may not turn out to be the best vehicles as far as investing for your kids is concerned. So, much better to have a plan and then execute that by buying term insurance, good mutual funds and debt products.

Elements of the Plan

1. Having a baby and the first year costs

Neha’s first question was when you should start planning financially for a baby, and while the earlier the better, as far as I’m concerned the most practical time to start planning is when you think about starting a family.

I would like to have a sense of what the doctor’s visits, hospitalization etc. costs and what are the big costs that you incur one year from having the baby. Those are the things that you have to face in the very near future, and you want to deal with those things and take care of them first.

These costs will depend on where you live, how much of this is covered by your health insurance, and asking friends and colleagues about these is probably a good start. I’m sure a lot of you have way more experience and insight on this than I do so please do leave a comment about this.

I think having a ballpark of this expense and saving up for this for about 12 or 18 months is a good start. I think the best vehicle for this is a recurring deposit. You know that you need the bulk of this money at a particular date, it has to be a very safe instrument, and it’s not likely to be a lot, so you can probably stash away a little every month from your salary in a recurring deposit without feeling too much of a pinch, and in the end meet this expense easily.

2. Accounting for increased expenditure

It’s only natural that you spend more now that you have an additional member in the family, so the question is how do you account for that – reduced savings, increased income or a change in lifestyle?

From what people tell me it’s a mix of a changed lifestyle and reduced savings – if you have a one year old you don’t go out to movies as much as you used to earlier, but now you have to buy six plane tickets instead of four – so that makes a big difference.

I’m not sure how one takes care of this, but you have to somehow mentally prepare for these changes in the time to come.

3. School Admission Fees

Starting school and sometimes even playschool is an expense that goes over a lakh these days! So, this is one medium term expense (3 – 5 years based on when you start to plan) that you have to take care of and it is big enough to merit attention right away.

A good way to plan for this is look for a mix of fixed income instruments – I think a mix of high yielding company fixed deposits, cumulative bonds and bank fixed deposits are a good way to build this portfolio.

The good thing about this is you have plenty of options these days, and most of them with very good yields so you can invest in a new fixed income product every three or four months, and keep building on this corpus – if you have 3 years to plan, then that’s 12 quarters, and plenty of time and option to save and invest.

4. Life Insurance

Now that you have added responsibility, you need to re-evaluate if you have enough life cover. A term insurance is the best way to do this, and it’s inexpensive enough that you don’t have to blow a hole through your pocket. Think about this, and the sooner you get the better it is.

Conclusion

I think this is a good place to stop, get some feedback and hear out some real life experiences from the readers here – I’m looking forward to the comments on this one more eagerly than the other posts because I am certain people who have gone through this have a lot more to add from their experience, and I’d like to do a follow up post with those insights.

23 thoughts on “Financial planning for your baby”

  1. Point #4 mentioned above should be taken seriously. Note that you need to get term insurance for YOURSELF (the earning member of the family). Let us pray that nothing happens to you. But if something happens, then your dependents should not be put to hardship. Also, esnure that everyone is aware of this term plan as insurance company doesn’t proactively tell your dependents later that they can claim it.
    Note that I have stressed on getting Life insurance for YOURSELF. The reason is, many greedy agents ‘force’ you to buy insurance (or a product which includes insurance) for your child – as part of financial plan for your child. This is wholesale nonsense. Your child doesn’t have a dependent, he doesn’t need life insurance.
    Once you have Life insurance for yourself, then you can look at simple investments for your child like RD, FD, PPF, Equity/Mutual fund depending on your comfort level. Do not get into complicated products.

  2. Good Article even I had a baby boy of 1.5 months..
    We should make some time like
    like Age = 16-17 : Technical Education fee Doctor/Engineer something …how much should be keep , keeping inflation in mind , which product FDs ?
    Next @ 22 if they want to go for Master may be MS,MBA from foreign institute.Heavy fees
    Another @ 28 for Marriage , more in case of daughter
    Another a contribution/help in buying them a house.
    And lastly something for grandh-children’s πŸ™‚ so that both children/grand-children remember of what we left for them πŸ™‚ …
    How should we plan all these..comments/suggestion

    1. That’s a lot of expenses and it will be great to be able to meet them obviously, but for most regular people living in India – it will be more reasonable to account for higher education in India itself, wedding and then some more. I think a MS or something from abroad is probably best done through a education loan – at least in part. But these are great points for a future post. I need to think through these and write about them.

  3. Hi Manshu
    I agree with you that Hemant’s post is very comprehensive one on this topic. So I would not like to repeat what he has already covered. Since I do not belong to your generation, my experience is very different. I have one brother and one sister. My brother is an engineer and sister is a doctor. Both are American citizens. I am an engineer. I am the only one in my family living in India.
    In the present generation, if three kids have to be provided with engineering/medical education, a lot of planning has to be done by the parents.I don’t think my parents really did any planning. The advantage they had was that both of them were working and they were in professions where you can continue to work long after you have retired. My father was an advocate and mother was a teacher.
    For my parents providing us with quality education was a priority and spending lavishly on weddings was not a priority. I feel this is the way it should be. I think our planning should be restricted to the point of educating our kids so that they can earn their own living and there should not be any difference in this based on gender.
    As far as foreign education, marriage, helping kids in buying house etc is concerned these have to be optional depending on the financial condition of the parents. There is no point in thinking whether your kids/grand kids remember you or not after you are gone. Things have changed a lot for the present generation. There is no point in living with the old mind set.

    1. I think a lot of it these days depend on both members of the family working, and the expenses are geared in a way that if one stops working then that’s a big stress.

      So, that’s probably another big factor that worked favorably in your example but is taken for granted these days.

  4. Well an interesting question and a a great start for a discussion and one which took me down in the memory lane. I had similar question way back in 1998 after I had a baby. Then Outlook money (then called Intelligent investor) had come out with issue dedicated to Your life’s biggest investment:The investment costs on a child: from cradle to convocation. The link to that post is here They have outlined the cost at each stage -the figures might have changed but the basic sub categories haven’t
    Quoting the figures from year 1998:

    Pregnancy cost :Rs 66,000 – 86,000
    MONTHLY AVERAGE Rs 7,333 – 9,556
    These costs relate to the first child.Costs for second pregnancy should be 40
    percent lower
    Total after 5 years : Rs 1,01,549 to Rs 1,32,322
    Monthly average after 5 years : Rs 11,283 to Rs 14,702
    Total after 10 years : Rs 1,56,246 – Rs 2,03,593
    Monthly average after 10 years : Rs 17,361 to Rs 22,621
    Total after 15 years : Rs 2,04,404 – Rs 3,13,253
    Monthly average after 15 years : Rs 26,712 to Rs 34,806

    I had written a post on Rising Education costs ! . Quoting from the post

    How much does a school education for a child costs in 2011? Rs. 94,000/- annually for single child on school education. This includes fees, books,transport, stationery, uniform, educational trips,building fund, extra tuition and extracurricular activities.

    Often I hear my colleagues who are going for admission of their first child shocked at hearing the cost of admission to nursery class which in Bangalore in a decent school(ex:DPS, NPS, Vibgyor) might run to a lakh in the first year. They say that this is what they would have spent in their entire education πŸ™

    1. Thank you for these numbers and one question I had is – 94,000 is the running cost right or is it the cost of getting into the school for the first time?

      Is that another lakh or so?

      Thanks!

      1. It depends. I can tell you about schools in Bangalore where I stay.
        We have schools like Bishop Cotton, New Horizon, Delhi Public which charge upto 2000 rs a month.
        And there are schools like National Public School, Vibgyor which charge about a lakh each year.
        The international schools like Indus International, TISB charge above 3 lakh a year.

        94,000 is the running cost every year.

  5. Hi,
    I am also not in your generation and having two grown-up children, one is already married and other is doing his higher studies. May advise is if both the parents are working you may please plan for how your child will be taken care of while you are in your work place.

    If one person has to leave how your income will get affeted. Commit your EMI’s based on this parameter.

    Do simple SIP’s in good mutual funds based on the goals and this will take care of all your financial problems.

    Leave the rest to God if you believe or to a super power.There are so manything which wont go as per our planning in real life.

    Regards,

    1. That’s a great point, and ideally there should be no EMIs to worry about but I know that’s not really realistic. In absence of that – just have EMIs to the extent that can be taken care of with just one person’s earning.

  6. Well this is something I was thinking to write on my own neglected blog from some time. But I guess writing to you here is a much better option ( can’t I goto jupiter for some time. It has 72 hrs day)

    Well I think I will list following things as necessary:
    1) Have your EF in place, pregnancy can have lots of unexpected complications which will lead to lots of tests, implication lots of money spend. Hardly any medical insurance covers costs of these tests. In my case, this cost was approx 10K every month.

    2) Increase grocery bills. You will be eating and definitely wanting to eat better food. More fruits, less junk etc. Approx cost, 5-10 K every month.

    3) All the medical insurances, almost, cover maternity hospital charges upto 50 K. Have another 50-60 K read in your EF as your bill might go over 50 K if you are going for private hospital. Sometimes, your chosen facility may not be cashless in your insurance. In that case you have to first pay hospital which will then get reimbursed.

    4) If a girl is working, she will get approx 3 months of paid maternity, in India. After that if you wish to take more time to spend with your blessing, you have to take loss of pay. So, do consider that in your financial planning.

    5) Your baby vaccinations will cost you around 7K in first 4 months. Rest I will let you know once I incur. Also there will be other Dr visits and I am not aware of any medical insurance which covers all this.

    6) If one have premature delivery then babies may need to be put in Nursery, consider its cost as well. I don’t have exact idea as fortunately I didn’t need it, but I estimated it to close to 1L at my time.

    7) If you are living in a single family, then once you want to join back after having baby, you have to consider cost of making arrangements for your baby care. It can be day care or some aaya, again cost have to be considered.

    8) Your small one will need clothes, nappies (or diapers if your choose that), cosmetics. Here I will suggest not to buy lots of stuff as babies grow FAST. And keep in mind baby stuff is EXPENSIVE. There will be other baby stuff required depending on choices you will make, like baby cot etc.

    9) Once baby will be close to 5M, you might need other gears, like stroller, walker etc.

    10) And if you still are left with some money, you can plan to buy more then basic things for you. I mean more then required maternity clothes.

    And then yes, Hemant’s article is good for planning baby’s future. But you also have to consider cost of bringing baby on this earth.

    My one last piece of advice:
    Babies are adorable and so is their stuff. You will want to buy anything and everything on this earth for your baby once you step in those baby shops. So be very very rational and ask your self lots of time if you will actually need it. Anfd don’t try to buy everything in one go. Initially only buy whats most imp and as your baby will grow you will automatically know what is needed.

  7. Typically we talk about our own financial planning which as a middle class Indian usually financial goals are:
    1) Buying a car.
    2) Buying a house.
    3) College education for kids
    4) Marriage especially if you have a daughter.
    5) Retirement plan
    Now a days people have also started including foreign travel as a financial goal.

    Remaining financial responsibilities for kids fit around our own financial plans or budget. For example:
    Which school to send would depend on how much I am willing to spend. Personally I cannot afford to send my children to International school, even if I wanted.

    What kind of clothes, toys to buy- branded or non branded?

    Now a days, parents are finding at times difficult to meet the rising cost of education at College level esp. post graduation. Engineering courses could cost you Rs 15 lakh for the four year course, Private medical colleges charge Rs 20 lakh for the five year course . IIM Ahmedabad charges around 14 lakh Rs for its two year PGP course, ISB Hyderabad 20 lakh. If you looking to send your kid overseas, the cost increases manifold. And cost are increasing day by day.

    There is saying in Hindi Per utne hi phelane chaihye jitni chaddar hoon – Keeping with neighbors might put one’s financial life in jeopardy.

    There is a right age and right time for everything including babies. It should not happen that one works hard to be really well settled in life before having kids and then they are unable to have one or are too old to enjoy.

    1. I agree with most of what you have said. We now live in era of iphones, ipads, malls, multiplexes, KFCs. Apart from the college education of the kids we have to consider the cost of providing bikes/cars, gadgets, branded clothes, petrol and telephone bills, entertainment, grooming, pocket money etc. of college going kids. Most of these expenses were not there when we went to college.
      You are right. Many working girls are now delaying matrimony considerably and planning for the kids quite late, which creates problems for some of them.

      1. I just have a small question Mr Kapila, don’t you think providing children with everything you mentioned will give them a feeling of entitlement without hardwork. So I hope you will agree with me that as parents we have to teach kids importance of hardwork and earning for your wants and delayed gratification.

        1. I am totally in agreement with what you have said. It is important to make our kids learn the value of money and to make them treat money with respect. Just because you have lots does not entitle them to get whatever they want. I personally think that we must teach our kids how to earn, spend, save and invest money wisely.
          I know we should not sit in judgement on others but I do find that those who come into money too suddenly by adopting questionable means love to flaunt their wealth. One popular method is by spending lavishly on their kids. We are living in a society where we have a lot of such people around us. It is a fact that our kids are influenced more by their peers than their parents.

    2. Totally agrre with you bemoneyaware.
      Everyword you have written strikes a chord somewhere. And according to me key here is to understand that yes you need it all (a good carrier plus children) but some things can wait and some can’t.
      But being there and done that, I can tell it’s not a easy choice for girls either way. There are guilts and grudges in both paths, so I have learnt to respect both decisions and understand that never judge anyone for their choices.

      1. Thanks Indian thoughts.
        Money is limited is what we need to realize and spend and plan accordingly. There are some things which are will always be beyond budget even if both husband and wife are working.

        Whether to quit job after baby is a personal choice of the mother and then of family. I had heard somewhere – Behind every successful man is a woman , but behind every successful woman is a support system- maids, parents or inlaws

        No one shoe fits all. I have seen women giving up high profile jobs and becoming happy home makers and I have also seen homemakers who crib about staying at home ;-). A woman and her family has to find the solution which works for them.

  8. Nice and very informative article.

    Child upbringing has cost at all stages -right from birth till the child get married.And each of these stages the list keeps on increasing. If one looks at the cost at every stage of upbringing the child, the numbers will throw surprizes. Even the school going cost are much more than just school & tution fees.

    If one need to plan this properly, one has to follow simple basics of money management-Budgeting. Its difficult for parents to calculate each cost individually and then figure out how much they have spent on child. But a simple budgeting tool can really make things simpler and more elaborate. Infact that’s the only way one can find out how much is being spent month on month.

    From child perspective also the learning on importance of money has to come at early stages.We all do it in a easy fashion but leave it aside as the child grows. Think of piggy bank-What a way to make the child learn.But its gone when the child has grown up. These simple learning tools have now to be carried till the child becomes self dependent.The means can changed but objective remains the same.

    I personally wrote two articles on child upbringing and wish to write more as i experience things through my Child Upbringing…

    http://www.fpgindia.org/2011/12/teach-your-kids-about-money.html

    http://www.fpgindia.org/2011/05/create-an-education-budget-for-your-child.html

  9. All said, and we plan for our kids education until they are capable of earning themselves to proceed further, there is a real threat to future generations. The issue being rising costs. What I have seen in my education and completing the post graduation is that, for that entire cost of my education, one cannot expect their child to even complete high school these days. We can save a lot, plan a lot and also sacrifice a lot. But when it comes to education, the only way is to see if the schools are really spending this money for the welfare of the kids. There is no set rules for schools spending in our system and so in the name of international schools, what you get at the end is a consumer who is brand conscious and not value oriented.
    Recently i heard some international schools are not allowing kids to bring their own lunch to school because they are fed in the schools. while i am not against this, but the only bad part is feeding the kids with loads of calories and sugar through international foods like Pasta and pizza which are not healthy for Indian life style. Also added trouble for parents to raise up to their needs when they totally do not eat Indian food. Also sports is less in schools which will cause even more damage when these heavy food is not burnt. I am not sure what everyone things about these and even any parent tried to question these developments, but then I do not approve this practice in schools. International schools should be more on international standards of education rather than just food and some practices that blindly followed.

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