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:-
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.
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.
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.
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.
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.