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Financial Hacks, As a Young Parent

  • May 2, 2019

Financial Hacks, As a Young Parent

 

“When someone becomes a young parent there is an emotional joy to it, but there are also Financial responsibilities like planning for child’s education.

The occasion was joyous and we were gathered around my wife’s bed in the Nursing Home. As I held my newborn daughter in my arms for the first time, I was mesmerized by her perfection. She was adorable. As I gazed down on her, my father tapped me on the shoulder. “Your new responsibilities are entwined with this little bundle of joy. Have you planned how to save for her? How to invest in her future? We started the process when you and your sister were born.”

The plans that were fluid till then got a jolt. Though I had a fair idea about investments but due to my busy schedule and stressful work it was difficult for me to give enough time and do research myself, I could not risk my little one’s future by doing random investments, I needed to make sure that I could provide for all her wants and needs in the future. After all, she came into this world depending on me to fulfill her dreams. That’s where my dad advised to seek professional advice from a Certified Financial Planner and then my father introduced me to Mr. Sharma.

 

Case study

With the help of Mr. Sharma, I prepared a financial plan for myself taking all the factors into consideration. Financial goals were discussed and set up to invest wisely so that we could reach the goals I aspired to.

My income is Rs 12,00,000 per annum. The first step is to keep aside at least 6 months of household expenses as a buffer for any emergencies like medical problems or a loss of income that could crop up. My savings of Rs 8,00,000 could be invested in short term debt funds that are safe and can give me a return of 6-7% per annum. 

The living expenses I may require with a new baby are about Rs 6,00,000 per annum. About Rs 30, 000 will be paid towards Term and Medical insurance. This will provide a safety net for my family if something untoward happens to me. The medical insurance will ensure that we can avail the best of treatment in case of illness. These are the basic steps towards financial freedom, I learned from Mr. Sharma, my investment advisor. These policies also save tax under sections 80C and 80D. 

That leaves an excess of Rs 5, 70,000 that I can invest for my future. Mr. Sharma had concrete plans for investments too! the first step towards building a portfolio for my child is to open a minor account for her in a bank. That done, we proceeded to the next steps. The amount my baby had received as gifts totaled up to a whopping Rs1,00,000. this amount was to be used to start a Sukanya Samriddhi Scheme that is a special small savings scheme for the girl child. Mr. Sharma proposed that any cash gifts she gets in the next 21 years can be invested in this scheme.

He suggested that I open a PPF for my child which will cover a part of her higher educational needs and also save tax for me. As it has a 15-year lock-in, I can look forward to high-interest rates ( current rate is 8% with a cumulative component). An investment of Rs 1,00,000 will give me approx. Rs 30,00,000 at the end of 15 years which I can use as the fund I need for her higher education.  This amount can be reinvested in short term debt or in PPF itself till needed. This will also contribute towards my 80C investments and returns that accrue in her file are tax-free too.

 Recurring deposits can be the best way to look after my short term goals as the investment is low risk and protects my capital. Setting aside Rs 1,50,000 p.a. in these could result in creating a corpus of Rs 5,25,917 in 3 years at the current 8% interest rate. This will suffice in paying the admission fees for High School and also for a downpayment on our car.

SIP’s will be the other instrument that will make reaching goals easy, advised Mr.Sharma. The rest Rs 3,20,000 can be invested to create corpuses for mid and long term goals.  he recommended choosing low-risk blue chip oriented funds for reaching mid-term goals. I reckon I would need about Rs 4,00,000 in 8 years for the vacation I dream of giving my family and Rs 15,00,000 for the down payment of my house. I am not in favour of buying a very expensive and large home as it will put a large burden of EMI’s on my shoulders. Rs 1,20,000 in SIP with a CAGR of 15% in 8 years will give you roughly this amount (Returns of most blue-chip equity fund SIPs over the last 8 years is over 15%). The house will also become an asset for our child. Real estate is also an asset class that has an important place in financial planning for the future.

The rest of the income that needs to be invested for the long term is about Rs 2,00,000. SIP’s in a variety of funds like ELSS (I still need approximately Rs 50,000 in tax saving instruments), large-cap and the riskier but higher return generating mid and small-cap funds will easily take care of my future long term goals of my child’s marriage and retirement. The historic returns over 25 years in a good and stable midcap fund are well over 16%. This should create a corpus of 6.7 crores. My budget for my child’s wedding would be about a crore and retirement corpus about 10 crores. This amount will be a good way to start saving towards it. I do believe that having a retirement plan is the best gift that we can give our children. The burden of looking after parents financially is huge and no child should be made to do it.

Conclusion

Financial planning is very important. It eases the mind and gives me a direction. I am forced to budget and that helps me save and invest to make my dreams come true. My child’s future is tied up with my plan, so I cannot take too many risks.  The trick is to evaluate my current position, invest smartly and keep reviewing these dynamic plans as required. Thank Goodness for Mr. Sharma!