No battle was ever won according to plan

One of the most interesting and lively discussions during financial planning is to agree upon estimated future rate of returns on different asset classes, as well as inflation rates over long periods of time.

On every other aspect of the plan, one party or the other has a greater say, and they can back them with numbers or experience. For example, if you take current assets, the financial planner has a greater say in which assets are good or bad based on his experience and knowledge of the market, and there is usually no room for debate on that.

On the other hand, expenses is the domain of the person whose plan is being made, and they have a larger say in determining whether their current expenses should be taken as Rs. 50,000 per month or Rs. 1 lakh.

But whether you take a 6% inflation rate for the next 25 years, or a 7.5% inflation rate is largely a subjective matter, and has to be decided upon in agreement with both parties. One or two percentage points make a world of difference because of the compounding effect, and the portfolio number at the time of retirement can change drastically based on what number you take.

Add to this the fact that you may say that equities will return 12% for the next decade but in reality the market is never smooth, it will be down one year, up another, and the link I shared last week shows the great difference in end portfolio numbers that happens because of this.

In light of all this, how do you ensure that the plan is not wrong or useless?

I feel that there are two ways of doing this.

The first and the simpler one is to be conservative, and ensure that all your assumptions are in line with each other. Take your expenses at the higher end, and ensure that you don’t take a conservative inflation rate and an optimistic equity rate of return.

The second and perhaps more difficult thing to do is to understand that this plan is going to change, and then adjust your plan according to changes in your life or market conditions two or three years down the line.

People who work on project plans in their professional lives can easily identify with this, and how the best laid plans change as soon as you start implementation, and if you don’t change the plan according to reality then it becomes pretty much useless.

I found an excellent quote about this recently which goes as follows:

No battle was ever won according to plan, but no battle was ever won without one. Dwight D. Eisenhower

Another version, which is probably the original goes as follows:

In preparing for battle I have always found that plans are useless, but planning is indispensable. Dwight D. Eisenhower

 

I think this is a great way to look at any planning process, be it financial or software management. Thinking through what needs to be done to achieve your goals two or three decades from now, what habits you should instill now, where you should invest your money, what are your priorities are far more important than the absolute rate of return that will accrue in those years.

Don’t worry too much about whether inflation will be 7% or 10% in the next decade, focus more on controlling your expenses, ensuring that your asset allocation is right based on your profile and that your money is not stuck in dud investments. These are things under your control, and these are the things where you can make a difference.

Use Google Calendar to track your monthly payments

I spent the last hour noting down all my recurring monthly expenses in Google Calendar after I forgot to pay two bills this month, and finally admitted that I can’t keep it all in my head all the time and be okay.

I started using Google Calendar because of two main reasons – you can synch it with your phone to get reminders and you can create recurring events that go on forever.

In the end however, there were four things that I found answers for, and I feel this is the best and easiest way to keep track of these four questions.

  1. What are the recurring payments that I have to make every month?
  2. When are each of these due?
  3. If they are automatically charged, which credit card or bank account do they use?
  4. What is my monthly recurring expense?

 Set up Google Calendar Events

The first step is to log in to your Google account and go to Google Calendar. After that click on the ‘Month’ view on the top right of the calendar to make it easier to add events.

Once you see the view, you can enter three pieces of information about every event.

  1. What the bill is about?
  2. How much is charged?
  3. Where it is deducted from?

I did a few sample entries, and after you make all entries, your calendar should look like this (click to enlarge).

Remember, while adding an event there will be a bold blue hyperlink ‘Edit event’ and you need to click that to open up another screen that allows you make this event recurring.

This is really important because if you don’t make it a recurring event you won’t get any reminders and it will also be difficult to view it all at one place a few months down the line.  You can make this event a repeating event by selecting the Repeat checkbox and then filling out the detail.

Once you enter the Calendar events like this you can very easily sum up all the expenses in the month and arrive at your monthly recurring expenses. I don’t use Google Calendar for anything else, so setting it up for this was quite good for me and I’m sure it has set me up to where I don’t miss any future payments just because I forgot them.

How to plan your investments once you are retired?

This is a guest post written by Manikaran Singal who is a certified financial planner and runs a personal finance blog - Good Moneying.

Retirement is very important and critical stage in one’s financial life. This stage can be made more enjoyable where you relax, spend time with family, pursue hobbies if you have properly planned for that. But it can be most horrifying phase also where your regular income stream is no longer available, with no pension provision and where you have not saved enough to take care of your retirement needs.  Due to the various challenges and risks associated with retirement, we recommend retirement planning should be given its due importance and starts as soon as possible.

Retirement Planning works in 3 steps – Accumulation – Preservation-Distribution.

Accumulation is the stage where we invest to generate a decent corpus which is assumed to take care of us during retirement years. This accumulation we do till retirement.

In Preservation stage we become cautious about our accumulated corpus and we start coming out of risky asset classes and start shifting the corpus into debt, though savings doesn’t stop during this stage also, as our regular income stream is intact.

Distribution is the stage when we make arrangements to use the corpus through interest, dividends and withdrawing capital which we have accumulated.

In the complete retirement planning, distribution is the most important of all, as all our efforts of accumulation and preservation were directed towards this stage only. With a regular income stream no longer available, the savings made over one’s working years now have to provide for all needs. Now your investments need to create a paycheque for you. In accumulation and preservation stages the mistakes can be ignored as you were getting regular income, but at distribution stage, small mistakes can cost huge.

Through this article, I will be discussing with you on the distribution stage of retirement planning and how you can plan your investments once retired.

1. First step is to prepare you on the risks front. Like :

a)     Longevity risk: We don’t know for how long we are going to live. Whatever life expectancy you have assumed during accumulation stage may not be correct. If you outlive that age and not used your corpus judiciously you may find yourself in financial soup.

b)     Health risk: At this age probability of health problems is much more. We don’t know till when health remains favorable on our side. And when it gets unfavorable how much of our accumulated corpus it may wash away.

2.     Have a look at your expenses.

This is very important as the ultimate target is about to generate comfortable income stream from the corpus to meet the basic and desired expenses easily. Here you may divide your expenses in 4 parts: Basic/desired/on dependents if any/Loan EMIs if any. Basic would include the family’s general and unavoidable expenses which may include the family gifts on various festivals/occasions, desired is what you want to do after retirement like going on annual or bi annual vacations, pursuing some hobby, some charitable or religious activity etc., On dependents means…situations where children are still studying or are not yet settled in life etc. and Loan EMIs.

3.     Investment Options.

When you have calculated how much is required, now is the time to look out for the options where you may park the lump sum amount to start getting regular income. Here one thing has to be noted that one should not ignore the growth aspect in investments and should give equal importance to that. To add to it, one should not get into wrong products with the lure of making fast money in the name of growth. Just reminding you again that mistakes made at this stage of life may prove very costly.

Make 3 investment buckets by investing corpus in different percentages.

Basic Bucket (50% -60%): Looking at the monthly requirement and pension inflow if any, one has to plan to fulfill the gap, for which one may use the products like Post Office Monthly Income scheme, Senior Citizens savings scheme , bank fixed deposits with monthly/quarterly pay-out options, Immediate annuity etc. I mean use those products which can supplement your monthly inflow. But here do keep in mind the taxability aspect also. All the so called safe instruments are taxable. So where the taxation crosses the acceptability criteria, then you may use Mutual funds Monthly income plans or park the amount in debt mutual funds and start systematic withdrawal plan, but please note in the latter you are withdrawing the capital part of corpus which should be last resort.

Health Bucket (10%-15%): After arranging for your current monthly requirement, put some percentage of your corpus into debt mutual funds or cumulative fixed deposits as a health fund which will take care of your those medical emergencies where expenses jumps over health insurance coverage.

Growth Bucket (20%-25%): Put the balance corpus or at least 20% of the total corpus in equity oriented Mutual funds diversified or index, to cope up with the inflation aspect and After every 5th year transfer the growth portion into the basic bucket, so the monthly income can be supplemented and put it in line with the increased expenses.

Some Do’s and don’ts after Retirement.

  1. Do review your financial situation every year.
  2. Do buy adequate health insurance coverage for yourself and your spouse. Count the annual premium in the basic expenses.
  3. Don’t buy or gift any investment product to any of your family member other than you or your spouse. Avoid gifting child plan to grandchildren etc. Don’t part with your savings in your lifetime. You will be soft emotionally gullible target to the sellers. So beware.
  4. Do keep working even after retirement.

Shocked!! But in many cases it becomes inevitable especially when you still have dependents, or paying Loan EMIs. The idea is not to enter retirement phase with the burden of Debt and dependents, and not to use the nest egg on these areas. Also please understand that stock trading is not working.

  1. Do take good care of your health. If at all you have any health problem better to take proper treatment. Many times I have seen people ignoring the health aspects due to the finances involved in the treatment. But please understand that your health is equally important for your wealth.
  2. Don’t overspend in retirement if you have not over invested while working.
  3. Don’t put your retirement corpus into Real estate due to the illiquid and unregulated nature of investment.

Retirement planning includes much more than just investing. It needs some behavioral adjustments also. The ultimate goal is steady, dependable and lasting income. With careful planning we can balance the needs of inflation protected income and long term growth during retirement.

Three thoughts on investing after you retire

For some reason, lately,  there have been a lot of questions about retirement planning and what to do with the money you get after retirement, and I think this topic deserves a mini series. Today, I’m going to write about three things that have been on my mind about this. Before I begin, for context, here is the full comment that prompted this post.

biswas July 10, 2012 at 7:37 am [edit]

There are many articles on how to plan for retirement.It will be nice if you can discuss on how to plan once one is retired.I am likely to retire in couple of months.I will receive a large lump-sump amount.I don’t know what to do except for FD.An article on this topic will really be appreciated.

As someone whose retirement is still a few decades away it is hard for me to really get into the shoes of someone who is retiring in a couple of months, so I’m going to write about three lessons I’ve learned from my elders who have already retired and made some good and bad financial decisions.

1. Don’t seek excitement in the stock market: A few years ago when online trading had still not caught on, it was quite common to go and sit in your broker’s office and execute trades. I used to go to my grandpa’s broker at the time and was surprised at how many retired folks “play” the market. In the end, none of them made any money, and most lost quite heavily, so if you’re seeking excitement in the stock market, that’s the last thing you want to do with your retirement savings.

2. Lock in your money in big investments: Someone in our family who was retiring soon told us over dinner that his elder brother who retired many years before him gave him this advice, and I think this is perhaps relevant to a lot of families.

His elder brother told him that over the years his retirement savings had been eaten away by giving small gifts and loans to people in need and the fact that people knew he had the money, made them approach him and talk him into sharing it with them.

He suggested that one way of avoiding this situation is to put your money in places and in chunks where it really hurts to give them away, breaking a fixed deposit of Rs. 5 lakhs is a lot more painful than writing a check for Rs. 50,000 from your savings account. Sounds like great words of wisdom to me.

3. No one knows any secrets: A friend’s dad only invests in post office schemes and bank fixed deposits and he is never tempted to make great returns on a swanky new insurance product or the stock market or anything else that’s hot at the moment. His philosophy is simple, there is only so much money you can make with money, so don’t get sucked into dreams of doubling or tripling your money in a year or two. No one knows any secrets.

When you think of all the smart people that invested with Madoff and never chose to question his returns, it’s obvious that there was an implicit assumption that somehow Madoff knew a secret that the rest of the market didn’t. That kind of thinking is at least part of what led them to believe in the Ponzi scheme. I think it’s wise to assume that no one knows any secrets, specially when dealing with all your retirement savings. Playing it safe is better than assuming that someone has access to a golden goose that he’s willing to share with you.

Finally, since I didn’t talk about any products, here is a link to an older post with a list of some safe investments that seem appropriate for this situation.

How to generate retirement income for parents?

This is a guest post written by Manikaran Singal who is a certified financial planner and runs a personal finance blog - Good Moneying.

This is a very common question these days among so called “Sandwich Generation” who’s juggling between the different priorities like “to manage between their child’s future and own retirement” and also taking care of the needs of their parents.

Being responsible children everyone wants to support the parents. They have sacrificed their desires, hobbies etc. to give us a secure future, so now is our time to pay back. Even though the topic is all about income generation, since I am a financial planner, I could not stop myself to add on some financial planning touch into it.

There can be 2 situations where the approach can vary while working on this aspect.

1)     When your parents are financially dependent.

2)     Where the parents are financially independent.

You have to follow 3 step approaches to work on this:

  1. Understanding: Making arrangements may not be enough unless that arrangement actually serves the purpose. You have to understand your parents’ requirements. You need to talk to them. Proper communication is very much required for proper planning. I know that subject of money has always been a taboo in our Indian society but this is where the challenge lies. Discuss with them their wishes, hobbies, pending desires, their monthly expenditure etc. If you are staying with them then it may be easy for you to understand the situation but if not then better to improve the communication. Don’t give solutions to them just listen. Listening is the key to proper understanding.

Also this step applies to both the situations mentioned above.

2.     Check out your cash flow situation:

As it is you who have to arrange income for them, so you need to have thorough understanding of your financials. This will help you in figuring out the grey areas where you can make some adjustment for betterment of your parents. You have to dig deep into your cash flows.

A)     Note down each and every expense, your discretionary / Non-discretionary spending.

B)     Family expenses, expenses on self, on child etc.

C)     What expense you are making on your desires and what on your needs.

D)    Insurance premiums of not required policies you are paying just because you don’t want to book the loss or your. So called friend or your banker would feel offended if you discontinue that.

3.     Making arrangements:

When you have figured out the requirement, needs and desires of your parents and also have given financial shape to those, now is the time to make arrangements for your targeted goal. This is because the arrangements required to be made for them has to be from the surplus generated out of your cash flows. At this step we have to consider the two situations mentioned above

a)     When parents are financially dependent.

This situation can be managed partially when you are living along with parents, as most of their basic expenses will get managed within the family expenses. But you have to take care of your parent’s desires and independence also. Along with you have to take care that they should not feel like a burden on you. So adjust your cash flow accordingly and start giving some monthly amount to them. Better to include this “monthly payments to parents” in your non-discretionary expenses option, so your surplus gets accordingly adjusted for your other goals. If the house is in your parent’s name then you may start giving them the monthly rent, this way you may get some tax benefit also. If you have some already accumulated corpus, then you may invest that in post office monthly income scheme, senior citizen saving scheme or bank fixed deposits to generate comfortable, safe and secure monthly income.  You may also buy the immediate annuity plan. Also if at all required you can use products like “Reverse Mortgage” to generate comfortable income for them. Don’t forget to get them adequately insured of health, as this will indirectly help you in saving your savings.

 

b)     When the Parents are not dependent.

If Parents are independent, getting a decent pension along with interest income, are adequately insured under government sponsored schemes and has no liability as such, then also it does not absolve you from your responsibility. Many times it has been seen that pension may not be enough or may only be enough for the basic expenses. So in this scenario you have to support your parents.

 

Where parents are independent, many times it has been seen that they are in a habit of distributing the surplus they have in the form of gifts, like giving down payment for car or house, or buying insurance policies in the name of grandchildren etc. Though one should not allow them to do this but all this should be handled tactfully as it should not even hurt there ego. In other words don’t allow them to part with their savings. You may gift them some things of necessity time by time and share with them there responsibility of gifting things to relatives on various occasions like marriage, child Birth, festival etc. Please note that you should not intrude in their privacy and dignity. Start a parent’s welfare fund kitty and keep on putting some amount every month for parent’s welfare and responsibility. Adjust your cash flows accordingly. This fund will help you to manage emergencies in a better manner. You may also gift them a vacation every year.

Please understand that in any financial arrangement, Intention matters more than resources. There are some more aspects to support parents besides generating regular income for them like making bank accounts joint, reviewing of Nominees, being in touch with doctors, getting regular health check-up, arranging a caretaker, a driver , streamlining the financials etc. which is very much required when we are involved in financial planning for parents. But to start with “work on to improving the communication” which is the most important among all.

This post is from the Suggest a Topic page.

Thoughts on Jago Investor’s Financial Planner Survey

Jago Investor, which is perhaps the best Indian personal finance blog, did a survey on what people wanted from a financial planner, and I thought the results were quite interesting, and worth sharing here.

I hadn’t taken the survey but if I had, my views would’ve fallen with the majority on almost all the issues, and none of the majority responses surprised me (the wording of the questions had a little do with that as well).

What did surprise me however was that 93% of the respondents were male. That doesn’t seem to be consistent with ratio of men and women readers.

Manish wasn’t surprised by the results and said it correctly represented his demographic. Although I’ve never done a survey here which would show the split between men and women, in answering comments and responding to emails, I would’ve thought the ratio is even or at least much more balanced than those results. This is something worth exploring further because if this ratio is correct then it doesn’t correctly reflect the ratio of working men and women, and it will be interesting to find out why that is.

The other thing that caught my attention was this result.

75% people said they will not go for any financial planning with corporates like ICICI Direct, Edelweiss or such firms.

On the face of it, this sounds like bad news of companies like ICICI Direct, but when you think about it some more, you realize that the financial planning market is just so small that it doesn’t make much of a difference to big corporates if people don’t want to go to them for their financial planning.

This does present a good opportunity to individual planners who are trying to build a business in this niche area and are taking risks leaving comfortable jobs, in many cases with these same big corporates.

This survey should hopefully give them some encouragement and gives a good perspective on this new industry, which is still in its formative years. The whole survey is a quick and interesting read and can be found here.

ICICI Bank b2 branchfree banking

Karthik left a comment about ICICI’s b2 branchfree banking the other day, and that was the first time I learned about this savings account from ICICI bank.

I asked a few people who I thought might have had personal experience with this but they didn’t and neither did they know anyone who did, and looking at ICICI’s website – it doesn’t look like this product does very well and I wonder if they still allow people to open this type of account. I think as you dig deep it’s easy to see why this never caught on so let’s look at some things about this account.

Branch Free Banking

First a little bit about b2 branchfree banking itself. The concept is very simple – you open a savings account which is not associated with any branch, and this account has no balance requirements or in other words it is a zero balance account.

Zero Balance Account

According to ICICI Bank, the two big benefits of this account are that you can have a zero balance account and you can get some extra earnings on this account since this is a low cost account for the bank.

I don’t know how appealing a zero balance account is for most people since a lot of salary accounts are zero balance accounts, and even if they are not – it is usually not a problem to keep Rs. 5,000 – Rs. 15,000 in a savings account.

Auto Sweep Feature

The second aspect of it – which is earning a bit of extra returns certainly makes you stop and investigate more. From what I could gather on their site – the extra earnings accrue because they have an auto sweep feature in the b2 branchless bank account. This works exactly like other auto sweep features where they will move a certain amount from savings account to your fixed deposit and then that will earn a higher rate of interest than the savings account. You can withdraw this money any time and in that sense it is not blocked in the fixed deposit.

No Branch Access or Checkbook

Since this is an online account you don’t get any access to a branch meaning you can’t go to a bank branch for anything and you don’t get a check book either. You can create a draft online which will be couriered to your house and they will charge you Rs. 15 for it. As far as I can see there are no other charges for creating a draft.

No ATM Card

You don’t get an ATM card with this account either and that to me severely limits what you can use the account for. You can only pay bills online using this account or use the Auto Sweep facility, and that’s about it.

That’s not really a lot when you consider that you can pay bills online easily with your other accounts, and if you really did want to benefit from high rates of interest on savings account you are probably better off utilizing a bank such as Yes Bank or Kotak bank.

I find it hard to get excited about this concept with whatever information I could get it and I would certainly like to hear from someone who has opened the account and how it benefited them.

Finally, one odd thing about this branchless banking is that you can only open it if you are resident of one of these cities. Now what sense does that make? You don’t have access to a bank branch, but you need to be resident of a particular city?

Here is a MouthShut review of  the b2 branchless bank account that Karthik left a link to that you may find useful.

This post was from the Suggest a Topic page.

Pay off house loan or invest?

Sandriano made a comment the other day with a question as to whether it’s better to invest in the NHAI bonds at 8.2% or pay off housing loan at 9%.

My response was that it’s probably better to pay off the housing loan if all your EMIs consist of mainly interest right now, but if that was not the case then we’ll have to look at it in more detail. He is in a stage where bulk of the EMI still consists of interest, and here’s how his loan looks like right now.

Thanks always for your inputs; always helpful in making informed decisions.
I think I got my answer. Nevertheless, here are the details. Bulk of the EMI goes towards interest.
Loan Amount: 28 Lakhs (LIC Hsg Fin)
Tenure: 20 yrs
Commencement: Dec 09
Interest: Locked for 8.9% for 3 yrs (until Nov 12) and market rate thereupon
Current Interest: 8.9%
EMIs paid till date (in months): 24

We will need to use the EMI calculator to see what the payment terms for this loan currently is and how will different payment terms affect this.

This calculator shows that the monthly installment is Rs. 25,000 – and during the term of this loan you pay Rs. 32 lakhs in interest in addition to the original 28 lakhs repayment. So, the whole repayment totals Rs. 60 lakhs over the period of 20 years.

This obviously sounds like a lot at first blush but consider the fact that Rs. 28 lakhs invested at 8.9% for 20 years compounded once a year yield Rs. 1.54 crores!

Now, Sandriano has already paid 24 installments so he has 18 years left, and the NHAI bond had a 8.3% / 15 year option so let me just assume that you will be able to get 8.3% for three more years so we can have a straight comparison.

I downloaded this excel calculator for easy reference and found that on these terms – you would have paid about Rs. 6 lakhs in EMIs for the first two years, but the principal component of that would only be Rs. 1,11,084 and your outstanding principal is still Rs. 26,88,916 (out of the original Rs. 28 lakhs).

So, in a manner of speaking – it’s as if you’re going to take a loan for 18 years at 8.9% today for Rs. 26,88,916 and you suddenly get a windfall of Rs. 1 lakh and you want to see whether it makes more sense to pay off 1 lakh from the principal of this housing loan or would it make more sense to invest this in a tax free bond at 8.3% for 18 years.

If you pay off 1 lakh from the housing loan then your new principal is Rs. 25,88,916 and your new EMI is Rs. 24,082. So, your total cash outflow for 18 years is  Rs.52,01,712 (24,082 x 12 x 18)

If you hadn’t paid off this house loan then your total cash outflow would have been Rs. 54,02,808 (25013 x 12 x 18). So, by paying off Rs. 1 lakh from the house loan, you save yourself Rs. 201,096 in lower EMIs over the course of this loan.

Now, in this case – you invested Rs. 1 lakh in the tax free bonds which earned you an interest of Rs. 1,49,400 (1,00,000 x 8.3% x 18 years) and you got the 1 lakh principal back at the end of the 18 years – so the total money you made in this investment was Rs. 2,49,400, which is Rs. 48,304 more than what you would have saved had you paid off your loan in the beginning of the time period.

So, based on this simple calculation I would say I was wrong earlier as you do get a higher cash-flow  if you invest in the tax free issue instead of paying off the loan.

The one thing I would like to add is that in this comparison is that in case of investing the money – you get a very large chunk – Rs. 1 lakh at the end of 18 years, and even if you assume an inflation rate of 6% for 18 years – that one lakh will only be worth approximately Rs. 35,000.

In contrast – the EMI savings are constant throughout the time period and by virtue of not being lumpy their value might be more in terms of present value despite the absolute number being low.

I know that you can add many more variables to this calculation like tax saved, present value of future cash flows, reinvestment of interest etc. but based on my earlier post in which I compared the tax free bonds to a SBI fixed deposit – I feel that adding so many variables right at the beginning overwhelms many people without having any commensurate benefit.

Finally, given this situation what would you do and what are the other factors that you consider while deciding whether you should pay off debt or make an investment?

Reader insights on financial planning for a baby

There were some great comments on yesterday’s post on financial planning for your baby, and the one that Indian Thoughts left had a lot of insights and since these are costs she has incurred recently, they’re very close to what you can expect in a similar situation.

There were plenty of things to learn from her comment, but the thing that struck me most was that a lot of these things don’t sink in or we don’t plan for them because it just doesn’t feel all that important or that big a deal.

I experienced that primarily because a lot of the things she wrote were things that I had read in articles earlier, but frankly, they didn’t quite feel that important until I read it in her comment, and realized that there is a reason why people keep mentioning these things again and again – because they are real!

For example – IT talks about eating healthier which costs more, and this is something I had read earlier, but it didn’t sink in as to how big of a difference that would make. Same thing with baby vaccinations, and the advice about controlling your urge to buy any and everything when it comes to your baby. I read these things several times earlier, but they never really sunk in.

It was a great comment, and she edited it slightly and posted it as a blog post on her own blog – I would highly recommend that you read it even if you’re not expecting a baby in the immediate future, it might just be something that lingers in your mind and helps you a few years down the road.

Read Cost of bringing baby on this earth

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.