As parents, we naturally desire to give the best possible life to our children... the best education, the best gifts, the best house, the best surroundings, the best marriage, and much more.
Unfortunately, when it comes to managing our money for them, we are definitely not doing our best. Here's the harsh reality check!
When you want to save for your children:
...You often invest in their name
This is not really necessary. Apart from providing some (false) mental comfort, that something is being kept aside for say their education or marriage, it serves no real purpose.
In fact, many people invest in their child's name, thinking that the income on the same would not be taxed. This is wrong.
In case you are not aware, there is a specific provision in the Income Tax Act regarding this. It clearly states that such income has to be clubbed with your income and taxed accordingly. You can get into trouble with tax authorities, if you don't club this income and evade tax.
...You often invest in Fixed Deposits
Education is becoming expensive at least by 10% every year.
Interest rate, that you can expect from fixed deposits, is at best around 8% (and taxable).
Suppose you desire to send your child to IIM after 10 years. Cost of doing MBA from IIM is around Rs.15 lakhs nowadays. So, after 10 years, it would cost you around Rs.39 lakhs.
For simplicity, let us assume that you have Rs.15 lakhs today, which you keep aside in a (so-called safe and secure) 8% Bank Fixed Deposit. Then, depending on your income tax bracket, after 10 years your corpus would be around Rs.26-30 lakhs. In other words, there would be a shortfall of around Rs.9-13 lakhs; even though you can meet the expenses at today's prices.
In short, FDs will never keep pace with the College Fees.
...You often invest in 'child' insurance plans
As mentioned earlier, education is becoming expensive at least by 10% every year.
Returns, that you can expect from such 'child-oriented' insurance policies (which are nothing but the traditional plans such as endowment or moneyback), will rarely cross the 6% barrier.
As mentioned earlier, it would cost you Rs.39 lakhs to educate your child at IIM after a decade.
To generate such levels of corpus, your premium amount in such insurance plans has to be around Rs.2.80 lakhs per year i.e. a total of Rs.28 lakhs over the next 10 years. For many, this is simply too exorbitant. Smart investment planning would do the same job, with much lower financial commitment.
Must Read: You Just Lost Rs.4.80 lakhs
Besides, all such insurance plans are highly rigid, leaving you with very little scope to modify your investment, in case there is any change in your plans. Penalty for premature closure is simply too high.
By the way, you can avoid the child-oriented mutual funds too. Instead, a well-diversified and balanced portfolio of the standard mutual funds, would provide better returns with lot more flexibility and diversification.
...You often buy Gold for their marriage
Like Fixed Deposits and Insurance Policies, Gold too will at best give near-inflation returns. It is unlikely to make you rich and wealthy.
As such, when buying gold, two things are important:
One, you should buy gold only to the extent you want to give away as gift, at the time of marriage of your children.
Two, you should avoid buying jewellery. It has too many issues... high margin in the gold price, high making charges and the high chances of the designs becoming old fashioned. Instead, Gold Bonds or Gold ETF would be the best way to accumulate gold for marriage purposes.
In short, don't be emotionally fooled and blackmailed by the word "child" in any investment product. The word CHILD in an investment is, in my opinion, synonymous with AVOID.
In fact, if you analyze the above money tips very closely, you will realize that you don't have to do anything different:
What is "good" for you, is "good" for your child too!
Therefore...
...Buy a term plan
— because term policy is the cheapest and the simplest way to secure your family's financial future.
...Buy plain vanilla traditional mediclaim policy (with a super top-up plan)
— this is the cheapest and the simplest way to protect against exorbitant medical expenses.
...Build a balanced portfolio
— your portfolio should include appropriate percentage of property, equity mutual funds, fixed income products (such as debt mutual funds, EPF and PPF) and gold.
Keep this thought in mind — always — and you will make the best money decisions — always — for your children (and yourself too).
In fact, one common behaviour among most parents, that I find totally "unacceptable" is...
... they want their kids to study very hard and slog, to get into the best of the colleges;
... yet they themselves will not put in any hard work, to best manage their money.
Unfortunately, when it comes to managing our money for them, we are definitely not doing our best. Here's the harsh reality check!
When you want to save for your children:
...You often invest in their name
This is not really necessary. Apart from providing some (false) mental comfort, that something is being kept aside for say their education or marriage, it serves no real purpose.
In fact, many people invest in their child's name, thinking that the income on the same would not be taxed. This is wrong.
In case you are not aware, there is a specific provision in the Income Tax Act regarding this. It clearly states that such income has to be clubbed with your income and taxed accordingly. You can get into trouble with tax authorities, if you don't club this income and evade tax.
...You often invest in Fixed Deposits
Education is becoming expensive at least by 10% every year.
Interest rate, that you can expect from fixed deposits, is at best around 8% (and taxable).
Suppose you desire to send your child to IIM after 10 years. Cost of doing MBA from IIM is around Rs.15 lakhs nowadays. So, after 10 years, it would cost you around Rs.39 lakhs.
For simplicity, let us assume that you have Rs.15 lakhs today, which you keep aside in a (so-called safe and secure) 8% Bank Fixed Deposit. Then, depending on your income tax bracket, after 10 years your corpus would be around Rs.26-30 lakhs. In other words, there would be a shortfall of around Rs.9-13 lakhs; even though you can meet the expenses at today's prices.
In short, FDs will never keep pace with the College Fees.
 |
| Always Remember: What is "good" for you, is "good" for your child too! |
...You often invest in 'child' insurance plans
As mentioned earlier, education is becoming expensive at least by 10% every year.
Returns, that you can expect from such 'child-oriented' insurance policies (which are nothing but the traditional plans such as endowment or moneyback), will rarely cross the 6% barrier.
As mentioned earlier, it would cost you Rs.39 lakhs to educate your child at IIM after a decade.
To generate such levels of corpus, your premium amount in such insurance plans has to be around Rs.2.80 lakhs per year i.e. a total of Rs.28 lakhs over the next 10 years. For many, this is simply too exorbitant. Smart investment planning would do the same job, with much lower financial commitment.
Must Read: You Just Lost Rs.4.80 lakhs
Besides, all such insurance plans are highly rigid, leaving you with very little scope to modify your investment, in case there is any change in your plans. Penalty for premature closure is simply too high.
By the way, you can avoid the child-oriented mutual funds too. Instead, a well-diversified and balanced portfolio of the standard mutual funds, would provide better returns with lot more flexibility and diversification.
...You often buy Gold for their marriage
Like Fixed Deposits and Insurance Policies, Gold too will at best give near-inflation returns. It is unlikely to make you rich and wealthy.
As such, when buying gold, two things are important:
One, you should buy gold only to the extent you want to give away as gift, at the time of marriage of your children.
Two, you should avoid buying jewellery. It has too many issues... high margin in the gold price, high making charges and the high chances of the designs becoming old fashioned. Instead, Gold Bonds or Gold ETF would be the best way to accumulate gold for marriage purposes.
In short, don't be emotionally fooled and blackmailed by the word "child" in any investment product. The word CHILD in an investment is, in my opinion, synonymous with AVOID.
In fact, if you analyze the above money tips very closely, you will realize that you don't have to do anything different:
What is "good" for you, is "good" for your child too!
Therefore...
...Buy a term plan
— because term policy is the cheapest and the simplest way to secure your family's financial future.
...Buy plain vanilla traditional mediclaim policy (with a super top-up plan)
— this is the cheapest and the simplest way to protect against exorbitant medical expenses.
...Build a balanced portfolio
— your portfolio should include appropriate percentage of property, equity mutual funds, fixed income products (such as debt mutual funds, EPF and PPF) and gold.
Keep this thought in mind — always — and you will make the best money decisions — always — for your children (and yourself too).
In fact, one common behaviour among most parents, that I find totally "unacceptable" is...
... they want their kids to study very hard and slog, to get into the best of the colleges;
... yet they themselves will not put in any hard work, to best manage their money.
