Tag: FINANCIAL PLANNING FOR CHILDREN

26 Jun 2018
financial planning for your earning child

Financial Planning for your earning child?

‘I hope my son doesn’t manage his money like I did when I was his age!’‘

Don’t think my daughter knows that there’s life beyond 20s too…she at least spends so and has saved maybe Rs 10,000 in the past four years that she’s been working.’

‘I’ve given up Sanjeev. My kids have categorically told me not to talk to them about saving anything from their salary. When they need any money, I’m their ATM…and mind you, they earn almost as much as me, with no responsibilities.’

While we’re not going to dwell on the parenting aspects of your life, we can definitely give you some idea of how your children should go about their financial lives and end up much better than where they seem to be headed now. Ease it in gently into your children and we’ve seen some good results come in even from ‘hopelessly-given-up’ parents!!

A few points before we go ahead with Financial Planning of our Earning Child:

  • If your children are working in the corporate, they’ll not get the fauji type life insurance, life-long medical cover, DSOPF and very importantly, the pension. Each and everyone of these will have to be carefully planned and meticulously executed.
  • If they are in the armed forces, they will have some benefits but other bigger financial requirements will have to be planned for by them, which most of us didn’t do in our time!
  • Long term thinking will be the key. If a Harley Davidson, Europe vacation or expensive guitar is being funded by dipping into the retirement corpus, the retirement will definitely not be a ‘golden period’ of life.

There are basically five things that your child in the corporate needs to take care of for life-long financial independence. For children in the armed forces, skip out Points 1 and 2 below. It is also very important that different financial baskets are made for all the important requirements and are not violated. Let’s look at them then:-

Life Insurance

Before even a single investment is done, protection umbrella over those who are financially dependent on your earning son or daughter is a must. Only and only Term Insurance Plan should be taken. A cover of about Rs 1 Crore should be the starting point, which will cost just about Rs 8000 per annum for a 40 years’ policy for a 25 year old male son, even lesser for a daughter. But it should be taken only if the person has anybody else financially dependent on him/her. Eg, if not yet married, no life insurance cover is required as yet.

Medical Insurance.

Another must for your son/daughter. Please remember that if the child’s monthly basic income is more than Rs 9000, the child is not dependent on you irrespective of age or marital status. A no-frills basic Medical Insurance cover of Rs 5 Lakh is adequate for most children. If the son/daughter is married, generally a Family Floater cover is more advantageous and Rs 10 Lakh of cover is adequate. Factor in the cover available from the employer too if a long term employment is visualised with the current employer.

Provident Fund.

PFs, including DSOPF, are meant for imparting financial security in one’s life against job loss or retirement. Most of the employers provide EPF (Employee Provident Fund – rate of interest 8.65% currently) where both, the employee and employer contribute. In any case, a PPF (Public Provident Fund – rate of interest 7.6% currently) account should be opened and kept alive by depositing the minimum Rs 500 per annum. When EPF is there, prefer EPF over PPF due to higher rate. When not, PPF can be progressed. Both have a ceiling of total Rs 1.5 Lakhs contribution per annum and double up as 80C tax saving avenue.

Retirement Corpus.

This is the biggest financial bugbear in the civilian world. Taking life time to be 85 years and working time to be 50-60 years of age, at least 25 years of good life needs to be lived after retirement. Considering their faster burn out, current generation is dreaming of retirement at even 40 years of age! Taking out last 10 years as sedentary years, at least 15 years of active life has to be lived without any income coming in. Two good options are there – National Pension Scheme (NPS) or Retirement Mutual Funds. Both have their positives and negatives. NPS has a some additional tax benefits, and annual recurring charges are very less. MFs have more flexibility, many more options and withdrawals are much easier. Totally avoid pension plans given by Insurance companies.

Investments.

This is what one saves for meeting life’s various financial goals, emergencies and for maintaining a good lifestyle. At a young age, equity or stock market investing is a must and no better avenue for that than Equity Mutual Funds (MF). Similarly, Debt MFs provide a better alternative for safe investments over bank FDs, RDs and the likes. Thus overall, the MF bouquet of Equity and Debt MFs can fulfil the entire investment needs for long as also short investing horizon in a better manner in terms of returns, tax-efficiency, flexibility of investment and withdrawal, and time period than any other investing avenue.

80C Tax Saving needs can be easily met by the investment combination of EPF/PPF/DSOPF and MFs.

In a nut shell:

  • Term Insurance for life insurance needs.
  • Medical Insurance if required.
  • DSOPF/EPF/PPF in that order of priority for PF requirements.
  • Saving for Retirement corpus is a probably the most critical of all investing, if will not have a pension.
  • Mutual Funds are the best vehicle for investments.

Do you need help in managing your child finances, or for your financial planning of your earning child write to us and we will help you for sure.

14 May 2013
You can help your earning child to manage money more wisely

You can help your earning child to manage money more wisely

Dear Friends,

Our full article on the subject which has been published in Times of India of today [14 May 2013 – In Delhi edition, it is on Page 9] is given below. Just for reiteration since the same has been sent to our subscribers earlier too last month.

There is no doubt that accumulation of substantial wealth generally occurs only over a sustained period of time. The best way to do it is the slow and steady manner in which your earning child needs to go the disciplined way and accumulate the drops that will make the mighty ocean. The main question is: what financial instruments to save in? Believe it or not, it has been statistically proven time and again that it is not the timing of investments but the asset allocation – ie, what all do you invest in and in what proportion – which matters over a long period of time. Wrong choice of instruments will do irreparable damage to the wealth creation efforts while incorrect timings can easily be handled by regular investments in a disciplined manner over a long period of time.

Generally it is seen that, at least in the initial earning years of an earning child, he/she is heavily dependent and influenced by his/her parents’ (generally father’s) pattern of investment. If the influencing parent is conservative and only goes in for safety of capital like in provident fund, bank FDs, insurance policies and NSCs, the child also thinks on similar lines. The fact that these fixed interest instruments are almost never able to keep up with the monster of inflation, and consequently provide negative inflation-adjusted real rates of return, is lost sight of. Thus, while the money may seem to be growing in these instruments in absolute terms, its purchasing power (or effective worth) is being lost at a rate equal to the difference between inflation and tax-adjusted returns of the investment instrument. To take an example – if a bank FD gives 9% rate of interest and the child is in 20% tax-bracket (ie earning between Rs 5 – 10 Lakhs a year), his/her actual returns on the FD are 9% minus 1.8% tax (20% of 9%), that is only 7.2% per year. With the consumer inflation stubbornly at around 9.5% today, the child’s money’s worth is being lost at the rate of 2.3% per year on a cumulative basis! The returns are likely to get further pruned in the current era of high-inflation and falling-interest-rates as this 2.3% gap widens. If the same money was to be invested in SIPs of equity-diversified mutual funds, the long-term returns of the same would be 12% per annum on a conservative basis while being fully tax-exempt as per the current tax laws. Adjusted against inflation, it is likely to give 3% positive cumulative yearly returns on a conservative basis. Of course, one has to keep faith in the long-term returns potential of equity while not getting unnerved by the short-term equity-typical fluctuations.

So finally, how should you, as a financially savvy parent, guide your earning child who has many years of savings potential with him/her? He/she should:-

  1. Save a small amount regularly in fixed-income instruments (like PPF or EPF) for safety and certainty of returns.
  2. Take a term insurance plan for getting a substantial amount of insurance (say, typically Rs 1 Crore or so) at a premium which will be meagre at his/her young age.
  3. Take a medical insurance preferably with life-time renewability, for an adequate amount unless he/she has the surety of employer-provided medical cover like in a Govt job.
  4. Go in for maximum amount of SIPs in equity-diversified mutual funds (MFs) on a monthly basis with long-term in mind. Investment in MFs should made through a carefully constructed balanced portfolio with regular monitoring rather than as stand-alone MFs bought just because they are individually performing the best today.
  5. At some point in future, typically 5-10 years after the child starts earning, you can tell him/her to go in for a house/flat using a home loan with EMIs on a regular step-up basis so that the loan repayment increases as the child’s income increases.

An investment pattern as above is likely to provide the child a substantial accumulation of wealth for future while still giving enough liquidity for any requirements in between.


With regards,

Col (retd) Sanjeev Govila, CERTIFIED FINANCIAL PLANNERCM

CEO, Hum Fauji InitiativesTM,
Your Long-term Partner for Wealth Creation
E-511, 2nd Floor, Ramphal Chowk, Palam Extn, Sector 7, Dwarka, New Delhi-110077    |   Tele: 9999 022 033, 011 – 4054 5977, 011 – 4214 7236  |  humfauji.in

 

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06 Aug 2011
FINANCIAL PLANNING FOR CHILDREN BY ARMED FORCES OFFICERS

FINANCIAL PLANNING FOR CHILDREN BY ARMED FORCES OFFICERS Part-2

Introduction

Financial planning for your children is probably something that takes up a lot of your ‘worrying’ time. You know that you need to start setting aside money for your child’s needs. But what you do not know is the ideal way to go about doing the same. Whether your objective is to provide for your child’s marriage, property or seed capital for a business venture for your child, the approach given here holds good.

Why is this exercise more strenuous for Armed Forces Officers

Due to the nature of the profession, wherein there is constant movement from one end of the country to the other and even abroad; when one does stop for a short while, it is in some unpronounceable place in the middle of nowhere; in the name of a financial advisor or facility, there is a semi-literate, maybe ill-intentioned, insurance agent available, if at all; the stresses and strains of the job keep own well-being far away from the mind; etc. All these issues combine to make a potion which keeps any thoughts of financial planning for own self far away from own conscious. The result is a sudden jolt-like awakening when the requirement is not merely knocking, but loudly banging at the door. Thus, in spite of all diversions, constraints, lack of adequate knowledge and facilities etc, one has to keep at it, come what may.

Concept of Financial Planning

Before venturing any further, it is pertinent to note that financial planning is not a one-time activity. Making of the plan is only the start of what is going to be an ongoing activity for many years to come.

We take the case of three families who need to plan for their young child’s college 15 years away. Taking today’s College costs to be approx Rs 2.5 Lakhs per year (implying 10 Lakhs for 4 years’ Engineering), with a 6% yearly inflation, it comes to Rs 23.96 Lakhs 15 years later. If the three families put in, say, Rs 1 Lakh today and then decide to pursue different methods of accumulating the balance money for their child, the results could be drastically different. A parent (Parent A), who is willing to take higher risk, would ideally be compensated by a higher return over long term – the portfolio will have a higher concentration of assets like equity mutual funds. Such a portfolio can earn a return of about 15% CAGR (Compounded Annual Growth Rate). At the other extreme could be a risk-averse parent (Parent C), who is investing only in schemes like the DSOPF/Public Provident Fund (PPF) and the National Savings Certificate (NSC). He can hope for a return of approx 8% per year. The third parent (Parent B) could take a middle path and have a cautious dabbling of ‘fully safe’ and some equity-oriented flavour. He/she could hope for about 10% per annum return. When we look at what they require to accumulate over a period of time, the results could be as follows:-

 

Parent A                              Parent B                               Parent C

 

Value of initial Rs 1 Lakh after 15 years                   8,13,706                               4,17,724                               3,17,216

Therefore, net balance to be accumulated           15,82,294                             19,78,276                             20,78,783

 

This balance money requires:

Yearly savings of                                                               95904                                    1,23,768                               1,31,748

OR monthly savings of                                                   7992                                       10,314                                   10,979

OR one-time accumulation of                                     1,69,114                               4,44,165                               6,28,615

* Includes combined fee and monies for living, for Engineering from a rated institute in India.

 

Coming to the solution, the first number that hits you in the table above is the ‘inflated’ cost of education and living expenses 15 years from now. Indeed, if seen in isolation, you might almost give up in terms of ever having enough money to provide for your child’s education need. However, what appears impossible is not really so. For a parent with some risk appetite, the money that needs to be set aside every month is just Rs 7,992!

Do’s of Planning

The ‘mantras’ given below may have to be applied as per your specific requirements and risk aptitude, though in most of the cases, their applicability is universal.

  • Have a distinct plan in place for each objective: Define each objective that you wish to accomplish i.e. provide for your child’s education, marriage or seed capital for a business activity. The next step should be, to have a definite plan in place for each objective, to allocate resources accordingly and most importantly, follow it through and through with discipline.
  • Engage the services of a financial planner, if not confident yourself: The importance of engaging the services of an expert and qualified financial planner cannot be overstated. He would make out a balanced portfolio for you to meet your goal and, if he offers those services, may even monitor its progress over its life-time. However, it pays to be actively involved in the entire financial planning activity.

Don’ts of Planning

  • Don’t delay the investment activity: Starting early will enable parents to gain from the “power of compounding”. In the example given above, if Parent A, who is taking more risk, starts say 5 years later. He would only accumulate Rs 4,47,819 from his initial Rs 1 Lakh investment and would require Rs 1,82,806 per annum OR Rs 12377 per month or a lump-sum accumulation of Rs 3,91,118 to get the required money for his child. The substantial difference seen above can be attributed to the fact that earlier, he had longer investment tenure and hence could enjoy the benefits of compounding. 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.

Way Forward

Just common-sense, perseverance and correct identification of objectives is actually all that you require to fulfil your obligations of a parent. It is very important to be proactive, avoid drift and identify the investment avenues that you are comfortable with. But do what you may, please start early – maybe even before the child is born!!

Introduction

Financial planning for your children is probably something that takes up a lot of your ‘worrying’ time. You know that you need to start setting aside money for your child’s needs. But what you do not know is the ideal way to go about doing the same. Whether your objective is to provide for your child’s marriage, property or seed capital for a business venture for your child, the approach given here holds good.

 

Why is this exercise more strenuous for Armed Forces Officers

Due to the nature of the profession, wherein there is constant movement from one end of the country to the other and even abroad; when one does stop for a short while, it is in some unpronounceable place in the middle of nowhere; in the name of a financial advisor or facility, there is a semi-literate, maybe ill-intentioned, insurance agent available, if at all; the stresses and strains of the job keep own well-being far away from the mind; etc. All these issues combine to make a potion which keeps any thoughts of financial planning for own self far away from own conscious. The result is a sudden jolt-like awakening when the requirement is not merely knocking, but loudly banging at the door. Thus, in spite of all diversions, constraints, lack of adequate knowledge and facilities etc, one has to keep at it, come what may.

 

Concept of Financial Planning

Before venturing any further, it is pertinent to note that financial planning is not a one-time activity. Making of the plan is only the start of what is going to be an ongoing activity for many years to come.

 

We take the case of three families who need to plan for their young child’s college 15 years away. Taking today’s College costs to be approx Rs 2.5 Lakhs per year (implying 10 Lakhs for 4 years’ Engineering), with a 6% yearly inflation, it comes to Rs 23.96 Lakhs 15 years later. If the three families put in, say, Rs 1 Lakh today and then decide to pursue different methods of accumulating the balance money for their child, the results could be drastically different. A parent (Parent A), who is willing to take higher risk, would ideally be compensated by a higher return over long term – the portfolio will have a higher concentration of assets like equity mutual funds. Such a portfolio can earn a return of about 15% CAGR (Compounded Annual Growth Rate). At the other extreme could be a risk-averse parent (Parent C), who is investing only in schemes like the DSOPF/Public Provident Fund (PPF) and the National Savings Certificate (NSC). He can hope for a return of approx 8% per year. The third parent (Parent B) could take a middle path and have a cautious dabbling of ‘fully safe’ and some equity-oriented flavour. He/she could hope for about 10% per annum return. When we look at what they require to accumulate over a period of time, the results could be as follows:-

 

Parent A    Parent B    Parent C

 

Value of initial Rs 1 Lakh after 15 years      8,13,706      4,17,724      3,17,216

Therefore, net balance to be accumulated 15,82,294    19,78,276     20,78,783

 

This balance money requires:

Yearly savings of                                          95,904       1,23,768      1,31,748

OR monthly savings of                                    7992          10,314          10,979

OR one-time accumulation of                    1,69,114       4,44,165      6,28,615

* Includes combined fee and monies for living, for Engineering from a rated institute in India.

 

Coming to the solution, the first number that hits you in the table above is the ‘inflated’ cost of education and living expenses 15 years from now. Indeed, if seen in isolation, you might almost give up in terms of ever having enough money to provide for your child’s education need. However, what appears impossible is not really so. For a parent with some risk appetite, the money that needs to be set aside every month is just Rs 7,992!

 

Do’s of Planning

The ‘mantras’ given below may have to be applied as per your specific requirements and risk aptitude, though in most of the cases, their applicability is universal.

  • Have a distinct plan in place for each objective: Define each objective that you wish to accomplish i.e. provide for your child’s education, marriage or seed capital for a business activity. The next step should be, to have a definite plan in place for each objective, to allocate resources accordingly and most importantly, follow it through and through with discipline.
  • Engage the services of a financial planner, if not confident yourself: The importance of engaging the services of an expert and qualified financial planner cannot be overstated. He would make out a balanced portfolio for you to meet your goal and, if he offers those services, may even monitor its progress over its life-time. However, it pays to be actively involved in the entire financial planning activity.

 

Don’ts of Planning

  • Don’t delay the investment activity: Starting early will enable parents to gain from the “power of compounding”. In the example given above, if Parent A, who is taking more risk, starts say 5 years later. He would only accumulate Rs 4,47,819 from his initial Rs 1 Lakh investment and would require Rs 1,82,806 per annum OR Rs 12377 per month or a lump-sum accumulation of Rs 3,91,118 to get the required money for his child. The substantial difference seen above can be attributed to the fact that earlier, he had longer investment tenure and hence could enjoy the benefits of compounding. 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.

 

Way Forward

Just common-sense, perseverance and correct identification of objectives is actually all that you require to fulfil your obligations of a parent. It is very important to be proactive, avoid drift and identify the investment avenues that you are comfortable with. But do what you may, please start early – maybe even before the child is born!!

Basic Mantras of Saving Money

Save at least 30-35 per cent of your monthly income in good quality savings instruments.

Keep at least 3 months of your monthly income for emergencies. Alternately, get a good credit card.

Clear all your high interest debts first out of the savings that you make.

And, the Basic Mantras of Making Money

The sooner the better. Trust in the power of compounding. Compounding is growth via reinvestment of returns earned on your savings. The earlier you start investing and continue to do so consistently, the more money you will make. The longer you leave your money invested and the higher the interest rates, the faster your money will grow. Research and history indicates these three golden rules for all investors:-

1. Invest early.

      2. Invest regularly.

      3. Invest for long term and not short term.

Research and history also indicates these four common investment mistakes:-

1. Investing without a plan.

     2. Not diversifying well enough.

     3. Ignoring risk.

     4. Getting married to your investments.

 IN A NUTSHELL

♠  Inflation, i.e. a rise in the general price level, is one of the major factors that necessitate financial planning.

♠   Financial planning aids individuals upgrade and maintain their lifestyles as also helps meet contingencies.

♠   Setting objectives is the first step in the financial planning process. Each objective must be backed by a dedicated investment plan.

♠  When faced with multiple objectives, prioritise and start off with the most pressing one.

♠  Start early and make up for any deficit at a later stage. Don’t delay the investment process on account of small shortage of funds.

♠   Always evaluate the risk in an investment opportunity before the return. Invest in line with your risk appetite, not the expected return.

♠   Market linked investments like equities get less risky with the passage of time. In fact, Mutual Funds investing in Equity (shares) are the least risky if investment horizon is beyond 5 years!!

♠   Risk is a very personal thing; there is no formula to calculate it.

♠   Often at an advanced age, risk appetite declines.

 

I have tried to include a large amount of tips in this small article, due to space constraints and reader-fatigue considerations. Any specific queries or advice can be sent to me on my email ID contactus@humfauji.in  or on tele 0 – 9999 022 033 / 011-4054 5977.

 

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