Lot of people (especially young people) think that planning is for those people who are retired or close to retirement. However, the reality is quite opposite to this notion. Usually life events trigger a need to plan for the future.
One of the most important events in any couple’s life is having their first child. A child will add lot of expenses from day 1 (actually even before they are born) In a few years, apart from expensive toys and clothes, school admission and school expenses will be added. These expenses will continue to increase as the child completes his/her schooling and moves into college. These are some standard and obvious expenses any parent has to plan for.
Planning is about ensuring that there is adequate income to meet the expenses as and when the expense needs to be met. To be adequately covered for these expenses, a portion of the current income has to be saved and invested over the working life of the individual to create the corpus required. Child’s future planning involves making an estimate of the expenses and the income required to meet it, calculating the corpus required to generate the income, assessing the current financial situation to determine the savings that can be made for child’s future and identifying the products in which the savings made will be invested so that required corpus is created and in which the corpus will be invested to generate the required income at different stages. And don’t forget that planning for your own financial needs apart from child’s future needs is equally important. So ideally start saving for retirement needs as well along with the child’s education expense.
Ideally, these savings should start as early as possible so that small contributions can grow to the corpus required with the benefit from compounding. The other benefit of starting to save early (in age) is that the amount which needs to be contributed periodically to reach the corpus is lesser. It may be necessary to start low and increase the savings as the income grows and the ability to save increases. Investments made in this stage should be growth-oriented since there is a long investment horizon for the short-term volatility in return to smoothen out. There is generally a greater ability to take risk and the portfolio should be invested to earn higher returns.
A combination of large cap mutual funds , mid/small cap mutual funds and direct equity may be used to grow your money. A good plan provides adequate corpus for various needs without compromising the standard of living of the person. It also involves smart selection of financial products to not only save for child’s future but also helps save on taxes.