Children’s Day special: Financial planning tips for parents-to-be

The joy of parents expecting a baby is overwhelming as it involves physical, emotional and financial preparedness on part of the parents. Expenses can burdensome if left unplanned, and in India not many parents take steps to remain financially prepared.

For parents-to-be, hospital bills on birth fall neatly into the expected category, so they plan in advance or have an insurance policy with maternity benefit to cover the costs.

Sanjeev Govila, CEO of financial advisory firm, Hum Fauji Initiatives added, “There are some additional costs like complications during delivery, cesarean section (surgical) deliveries of babies, one of the parents (generally the mother) having to leave the job post-delivery leading to income loss for the family, etc. which may come unannounced and they are costly affair.” So, expectant parents need to plan for these costs as well in advance.

On this Children’s Day let us look at some budgeting and investing ideas which could help ride out the costs for parents-to-be.

Pre-delivery financial planning tips
i. Keep emergency corpus
Ideally parents should start planning to build an emergency corpus at the earliest right when they decide to have a baby. Nevertheless, one can still start planning leading up-to delivery period, and build an emergency corpus to support unbudgeted expenditure in form of medical or non-medical expenditure. Dinesh Rohira, Founder and CEO, 5nance.com said, “The amount should be equivalent to 5-6 months of overall budgeted expenditure. This can be parked in liquid funds on monthly basis which can generate about 6-7 per cent annualised returns.”

ii. Pre-plan your new budget
Although many tend to ignore this phase of planning, but it is critical for a smooth transition for new parents without a bumpy ride. The preparedness to phase through a single source of income is particularly important as overall expenditure is borne by single person (father). Rohira explained, “Generally, there is immediate surge in expenses by 5%-7% in the initial period after baby is born. So, having a pre-planned new budget offers an idea to estimate costs and take necessary course of action to sustain across this period.”

iii. Check policy terms of employer group insurance
Most employers offer a group insurance scheme which will be handy to take care of medical expenditure during maternity. Although it might differ from one employer to others, but it is always prudent to check the health cover available and know the terms and conditions. This employer group insurance can offset the hospitalisation costs by about Rs 60,000-70,000 in private clinic during maternity.

iv. Clear-up outstanding debts
It is a common knowledge that with the birth of a child, the expenses also rise. Vijay Kuppa, Co- Founder, Orowealth recommended, “To clear outstanding debts as much as possible before baby is born. As this will help new parents in freeing up funds when the baby arrives.”

Post-delivery financial planning tips
After an arrival of baby there is rise in household expenditure which is excluding expenses related to education or occasional events. As a parents there is an obligation which are short-term and long-term in nature. In order to secure this obligation which is mostly in value term, it requires a planning that are in tandem to goals. Following are immediate steps that parents need to take post-delivery of a baby.

i. Start mutual fund investments aligning to goals
There are multiple goals on short-term and long-term basis after child is born that includes birthday occasion, schooling, higher education and wedding. All this goals are in value term and requires an early planning by new parents. Therefore, a parents should start SIP at earliest with suitable amount to achieve their children goals. Further, investment product should be selected prudently depending upon the tenure available. Given below is an illustrative table of common goals with investment recommendations from financial expert.

ii. Increase your life cover in term plan
There is always a need to take care of children even during your absence. Although, it is uncertain to encounter the unfortunate but your preparedness will likely have a positive implication on your family. Rohira suggested, “Review your existing term insurance cover and take a term-plan cover that is at least 20 times your annual income and now covers future expenses of children in the cover.” This should be your top priority after baby is born.

iii. Add name of baby in health insurance plans
You should add a name of a baby in existing family floater plans with the employer and in policy you have bought separately for your family. Rohira advised, “In case, you don’t have a health insurance plans then you must buy a family floater plan with cover of about Rs. 5 lakhs at least to take care of health related expenditure.”

iv. Investing gift money
With the birth of your child, you are bound to receive a lot of well wishes and gifts from your family and friends. Considerable amount of such gifts might be in the form of money. Kuppa said, “You need to properly plan for investing this gift amount in a suitable investment avenues to make the most out of it. There are numerous investment avenues available that will help you save up for a better future of your child.”

Financial planning habits new parents need to avoid
i. Avoid investment products with a very high lock in period. Govila said, “No child needs an insurance product till he’s got financial dependents. So, stay away from investing in child insurance plans.”

ii. Govila added, “Do not display your love by spending on things for your child which have doubtful utility or you're doing only for 'status-display', being pressurised by the child or to compete with somebody else.” It'll give you and your child no worthwhile value in the long run. Instead, spend more on travel, books, cultural and literary experiences for the child than on food, gadgets and toys to truly enrich your child.

iii. Do not postpone your financial planning. Arrival of a new member in the family certainly has a huge influence. It surely gives rise to a lot of new expenses. Kuppa said, “New parents must visit financial advisor at least once to take a review of their situation and plan their budgets accordingly.” You should not delay such important step as it can help you create a better future for your child and family.

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