Smart money moves for new parents
The arrival of
a baby can send the household budget into a tizzy. Find out how to retain
financial stability and secure your child’s future
To say that
life changes radically after the arrival of a baby is an understatement. While
one takes measures to stabilise the body and mind, surprisingly very little
financial preparation is undertaken to deal with the new development. The
medical expenses during the pre-delivery period and delivery are often rustled
up from the immediate cash flow; the functions felicitating the birth and
school fees are taken care of by monetary gifts from family or personal loans;
the investment for long-term goals is typically an erratic endeavour, laced
liberally with ignorance. It would be so much easier to enjoy the process of
having and raising a child if it were not marred by financial constraints.
Ideally, the saving should begin the moment you plan a baby, splitting it into
two bucketspre- and post-delivery.
PRE-DELIVERY PLANNING
Save for medical expenses: Considering
the high charges for medical tests and hospitalisation, and poor maternity
benefits in health plans, it would be prudent to put away a small amount every
month in a liquid fund right after you decide to have the baby. For most
private clinics or hospitals, the expenses for pre-delivery tests and delivery
can ratchet up to ₹3 lakh. If you
haven’t saved, you will either have to dip into your savings or cash flow,
unless you are covered by your employer or the government.
Check for employer group
insurance: The individual health plans offering maternity coverage
typically come with limited payouts depending on the sum assured and these
often fall short of the hospitalisation costs. They also have high premiums and
a waiting period of 2-6 years. Instead, check if your employer provides a group
health cover, which offers a better coverage at nominal cost. “Such covers
reduce your financial burden considerably and free up liquidity,” says Jayant
Pai, Head, Marketing, PPFAS Mutual Fund.
Know your company’s leave
policy: If you are employed, check the period of fully paid
maternity leave available to you. According to the Maternity Benefit
(Amendment) Act, 2017, a woman employee with less than two children is entitled
to a maternity leave of 26 weeks. However, there could be a variation in the HR
policy of your company, so you need to check this beforehand. If you want to
extend the leave, find out how much will be paid for, if at all, and whether
you can combine other forms of leave, such as privilege or medical leave. Also
check the option of taking a sabbatical in case you want to be away for a
slightly longer period.
Build an emergency corpus: This is
a crucial buffer you should have for any medical or non-medical emergency that
may crop up before or after delivery. The amount should be equal to at least
six months of your household expenses, and should be in addition to the medical
corpus you build for pre-delivery check-ups and hospitalisation. This can also
serve as a buffer for the financial constraints you may face after the baby
arrives.
Plan a new budget: “You can
expect at least a 10% rise in the household budget after the baby arrives,”
says Financial Planner Pankaaj Maalde. Instead of speculating, put it down on
paper or Excel. To your existing budget, add the possible new expenses,
splitting these into four categories—regular and one-time baby products;
baby-related services; financial products to secure the child’s future; and the
investments to be made for child-related goals. It is important to distinguish
the essential spends from discretionary ones though it is difficult to stop
splurging on a newborn. You would be better off investing this amount for the
child.
Prepare for a single income
household:
If you are working and decide to quit for a
considerable period of time, your budget will take a sharp hit. “If you plan a
baby when you are already paying a big home loan EMI and the woman is set to
quit work, the financial stress levels can zoom,” says Nitin Vyakaranam, CEO
& Founder, ArthaYantra. If you cannot avoid all the spends, plan your
finances much before deciding about having the baby. Make an estimate of the
total financial outgo and match it with your income to check for the shortfall.
Since you cannot stop the EMIs, insurance premium, or mutual fund SIPs, you
will either need to have a big contingency corpus to ride the shortfall, look
for another source of income, or cut down your household expenses drastically.
A good option is to try to live on a single income for a few months before
quitting work by saving the wife’s entire salary. This will not only give you
an idea about how easy or difficult it will be to sustain but also help build a
substantial corpus to tide over the difficult period. If nothing seems to work,
the woman may have to rejoin work after the maternity leave. In such a case,
you will need to have a support system at home to look after the baby. If you
decide to hire a full-time maid or avail of daycare facilities, calculate the cost
of both the options.
Get insurance: If you
don’t have life insurance, buy a term plan that is 8-10 times your annual
income. Understand that having 3-4 traditional plans will not typically provide
a good cover and you will need to buy a pure term plan instead. As for the
medical insurance, if you have individual health plans, it is advisable to pick
the more cost-effective family floater plan, which covers all the members of
the family, including the child.
Make or update will: Though
most people do not take this step, it is a good idea to make a will when you
have a child, or if you already have a will, to update it by including the
child. “Since the child is a minor, it is important to appoint a trusted
guardian,” says Rohan Mahajan, Founder & CEO, LawRato.com. “You can
also make the child a nominee for your investments and can list it in the will,
but again you will have to appoint a guardian for the minor,” he adds.
Investing monetary gifts: At
birth, the child invariably receives gifts in the form of money from family and
friends. To avoid frittering it away or leave it idling in a bank account,
invest this money for the baby’s long-term goals and let compounding work its
magic.
Meeting short-term goals: Parents
typically fail to take into account the shortterm goals in the first few years
like ceremonies linked to the baby’s naming or baptism, the first birthday
party, the start of playschool at 2-3 years, and finally the admission to a
proper school at around four years. For each goal, a large corpus of ₹50,000-3 lakh may be required.
Fix the amount you are likely to spend and start investing it. “Put it in the
less volatile liquid fund or an ultra shortterm fund, or even a recurring or
fixed deposit, for goals that are a year or less than a year away,” says Pai.
For goals that are 3-4 years away, you can invest in debt funds.
Meeting long-term goals: The two
non-negotiable, long-term goals for most parents are the child’s higher
education and wedding. While looking for an investing instrument for these,
consider two criteria. It should offer high returns over the longer time frame
to beat inflation, and it should enforce investing discipline so that you don’t
dip into the corpus for any immediate need. “Ideally, you should have a
portfolio and invest as per the risk-reward profile. So for short-term goals,
have more debt than equity, and for long-term goals, have a higher exposure to
equity,” says Vyakaranam.
The traditional insurance plans like endowment or
moneyback may not be a good option since they offer very low returns and an
insufficient cover. Real estate and gold should also be picked only for
emotional value or if you have an adequate portfolio. So, the options you can
pick from are equity or equity diversified mutual funds and equity-linked
saving schemes, for equity, and for the debt option, the PPF and Sukanya
Samriddhi Scheme. Another lure for most parents is ‘child plans’, which are
typically traditional insurance plans, Ulips and hybrid mutual funds. All such
plans are prefixed with ‘child’ to act as a psychological barrier for them to
redeem or sell. It is important to understand that these are not different from
other plans in their categories. So a ‘child mutual fund’ is essentially a
hybrid or balanced fund. The bottom line is to not pick a ‘child’ product
blindly, but understand it and then decide.
Riju Mehta
TNN 11JUN18
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