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 planÂ 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.
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.