While planning for your child's future, there are some thumb rules that you should bear in mind. These rules will serve as guidelines for the financial planning exercise and ensure that you stay on course to achieve your targets. We present a list of do's and don'ts to be followed while planning for your child's future.
Dos of planning
Have a distinct plan in place for each objective
The process should commence by defining each objective that you wish to accomplish i.e. provide for your child's education, marriage or accumulate seed capital for a business activity that the child might undertake, among others. The next step should be, to have a distinct plan in place for each objective and to allocate resources accordingly.
Given that the various objectives are likely to fructify at distinct periods of time, it makes sense to have different plans working for each objective. For example, if the child is 5 years old at present, his education portfolio might have a 10-Yr time frame, while the marriage portfolio could well have a 20-Yr time frame.
Engage the services of a financial planner
The importance of engaging the services of an expert and qualified financial planner cannot be overstated. The financial planner will draw the investment plans, monitor the same and play a vital role in ensuring that you achieve your stated objectives. Remember that the financial planner's forte should be his advice (across investment avenues) and prompt service. Don't associate yourself with advisors whose scope of activity is restricted to delivering forms and collecting cheques.
Participate in the process
It pays to be actively involved in the entire financial planning activity. Regularly scrutinise the portfolios that your financial planner has helped you build and find out if they are shaping up as expected. Similarly, don't hesitate to question the financial planner's recommendations and enquire as to why a given avenue should be chosen over another. Your participation will not only ensure that you are unambiguously aware of how your portfolio is progressing; it will also keep the financial planner on his toes.
Don'ts
Don't delay the investment activity
Often the investment activity is delayed because parents don't have sufficient funds on hand. They end up waiting for an opportune time to start the process. Refrain from doing so. The right approach is to start investing at the earliest and make up for any deficiency at a later stage. Any delay in starting the investment process only makes the target that much harder to achieve. Conversely, starting early will enable parents to gain from the "power of compounding". An example should clarify this.
Say family X and family Y are planning to create a corpus that will provide for their respective children's education expenses, 20 years from now. Family X being the more proactive of the two, starts investing Rs 10,000 every year at 8 per cent per annum. Conversely, family Y starts the investment process after 10 years (i.e. they have an investment horizon of 10 years vis-a-vis 20 years for family X). However, to make up for the lost time, family Y decided to double the investment amount i.e. they invest Rs 20,000 per annum at 8 per cent for a 10-yr period.
It pays to start early!
| Family X | Family Y | |
| Amount invested (Rs per annum) | 10,000 | 20,000 |
| Tenure of investment (years) | 20 | 10 |
| Returns (% per annum) | 8 | 8 |
| Maturity amount (Rs) | 457,620 | 289,740 |
At the end of the stipulated investment tenure, family X accumulates a sum of Rs 457,620, while family Y accumulates only Rs 289,740. The substantial difference can be attributed to the fact that family X had a longer investment tenure and hence could enjoy the benefits of compounding. Family Y failed to match the corpus accumulated by family X, despite having doubled the investment amount. The message is simple it pays to start early!
Don't dip into your child's portfolio
Resist the temptation to utilise the monies that have been set aside for the child's future needs, for your present consumption. These monies should be treated as sacrosanct and utilised only for their stated purpose. Failing to do so could mean that you are faced with a shortfall while providing for your child. And that is a scenario which no parent would like to be faced with.
By Personalfn.com, a financial planning initiative Just released - The Guide to Financial Planning. Get it FREE! Click here!