For a parent, if there is one thing that is paramount in her life and gives her the utmost happiness, it is ensuring that her children are given opportunities to blossom into well-rounded human beings, confident and capable of dealing with the world.
Sadly though, there is usually a gap between desire and action, as most parents wake up to the task of planning for their children’s basic and higher education when there is not much time left. These desires cost large sums and are practically impossible to achieve without compromising on other goals if one doesn’t plan for it well in advance.
Also, apart from investing for the purpose of education, it is a great idea to involve your children very early in the personal finance journey. Schools don’t prepare students in handling finances and most parents do not discuss money with children. As a result, when they grow up, they are woefully under-prepared in making money work for them; in many cases, they grow up with a large sense of entitlement, never realising the effort, planning and sacrifices that went into building enough wealth to fulfilling their dreams.
When we interact with customers, we often see how they could have benefitted by avoiding a few traps or being more conscious of the decisions made. Here are a few aspects to ponder.
Don’t fall prey to ‘child plans’
No matter what you are saving for, the basics of choosing your asset class remain the same. Many times, the product name prompts one to invest without doing a deep-dive into specifics of the scheme on offer. In a majority of the cases, the objective may have been better-served with a product that is not specifically meant for children.
Insurance isn’t investment
The primary purpose of insurance is to take care of your loved ones in case of your unfortunate demise. In its pure form as term insurance, it is available only to people with an income. Having an insurance cover for a child is therefore meaningless. We once came across parents who had taken one of these child plans and in a very unfortunate incident lost their school-going child. When the insurance was paid out, they were inconsolable and donated the entire amount to charity.
Start saving for your children’s goals early
Typically, goals related to children should be long-term goals. You can then invest in equity, where time can be your best friend. But many start late, and end up compromising on their other goals to fulfil their children’s. If you plan early, you can have a good portion of your savings in equity, and can make the journey much more comfortable. Remember though to switch your investments to debt when you are relatively close to the goal, typically 2-3 years before the amount is due.
Retain the ownership of your savings
You can save with children-related goals in mind without investing in the child’s name. Remember, when your child turns 18, he/she will have ownership of the asset. This could be a tender age to have absolute control over a large sum of money. Ear-marking your investment with the child’s name and goal is a good idea and dissuades one from dipping into it at the smallest of pretexts.
Involve your children in the savings discussion
Children pick up habits by following your behaviour. It is a good idea to have periodic discussions with children on how you have saved and how well the investments have done. Older children (aged 10 or more) can follow your statements and often find it very exciting to see how different asset classes behave. My son takes an avid interest in the performance of investments made in equity, mutual funds and other debt instruments and sometimes himself initiates discussions on performance. When we play games such as CashFlow and Chanakya Chakra, children relate it to real life, which reinforces their learning.
Education loans, a sensible option
The entire interest paid on an education loan can be set off against your income. When you think through this and take a loan, it may actually prove to be a better option than dipping into your savings, especially if the investments are doing well.
Don’t compromise on your goals
Remember, while loans are easily available for education, nobody is going to fund your retirement. When you are unable to cough up the required amount, it’s time to pause and see what alternatives you have. Don’t think of dipping into your retirement savings. The initial reaction of most customers is to dip into either their EPF or other retirement savings when they encounter such situations. It takes considerable amount of hand-holding and discussion to dissuade them from going ahead.
All of this is meant to help you take informed decisions when it comes to your children. The most important point to remember though is to start early. Many people delay the decision as they have no idea of what path the child is likely to take. When in doubt, speak to mothers of grown-up kids and take the middle path in terms of savings. If the child and you aspire for something more than what you had initially planned for, scaling up your investments will be easier than starting afresh later.(The writer is a Certified Financial Planner and Founder of Finwise Personal Finance Solutions)