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.
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.