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.


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.

11 Mar 2011


Alice                      :               Which road is the right one to take?

Cheshire Cat      :               Depends on where you want to go.

Alice                      :               I do not know!

Cheshire Cat      :               Then any road will get you there!

                                                                                                                – Alice in Wonderland


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 education, marriage, property or seed capital for a business venture for your child, the approach given here holds good. The key lies in identifying each objective that you wish to provide for in an unambiguous manner and then quantifying it. While planning for your child’s future, there are some thumb rules that you should bear in mind which are given as a list of do’s and don’ts later in this article.

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-educated insurance agent available, if at all; the stress 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 own planning 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. After all, the duty towards our families has to take a priority somewhere high up on the scale.

Concept of Financial Planning

Before venturing any further, it is pertinent to note that financial planning is a much personalised activity. It will work best for you only if there is customisation to suit your exact needs and profile. Also to be noted is the fact 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.

The table below compares investment strategies followed by three parents as per their risk profiles. The point to see is that, the parent, who is willing to take higher risk, would ideally be compensated by a higher return – the portfolio will have a higher concentration of risky assets like equity mutual funds or Unit linked Insurance Plans (ULIPs) with high equity exposure. Such a portfolio can earn a return of about 15% CAGR (Compounded Annual Growth Rate). At the other extreme is a risk-averse parent, who is investing only in schemes like the DSOPF/Public Provident Fund (PPF) and the National Savings Certificate (NSC). Alternatively one can invest in mutual funds and ULIPs, which invest in Government of India debt instruments. A portfolio of these schemes will normally earn a return of about 5.5% CAGR over the investment horizon. The parent with a moderate risk appetite should have a combination of risky and less risky assets. We have assumed that a moderate risk portfolio can yield about 12% CAGR.


  Case 1 Aggressive Case 2


Case 3

Risk Averse

Cost of College Education today* Rs 5,00,000 5,00,000 5,00,000
Time to College yrs 15 15 15
Expected inflation in fee % 10 10 10
Expected Future Cost of College Education Rs 20,88,624 20,88,624 20,88,624
Money already set aside Rs 1,00,000 1,00,000 1,00,000
Expected growth of assets (Post tax) % 15.0 11.5 5.5
Value of existing assets at the time of need Rs 8,13,706 5,11,826 2,23,247
Therefore, net to be accumulated Rs 12,74,918 15,76,798 18,65,377
Monies to be accumulated… Rs 12,74,918 15,76,798 18,65,377
Annual Saving of Rs 43,897 58,323 93,206
Or Monthly investments of Rs 3,658 4,860 7,767
Or a one-time investment of Rs 2,56,680 4,08,072 9,35,564

* Includes combined fee and monies for living, for Engineering and an MBA course from a rated institute in India. Tax rate assumed at 30% plus applicable surcharge.

Another factor that a parent needs to keep in mind is that any solution, where all the money is invested in one asset class, is not an advisable proposition. Coming to the solution, the first number that hits you in the table 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 a high risk appetite, the money that needs to be set aside every month is just Rs 3,658!

Mutual Funds for Your Child

The good news for parents is that there is common ground between their objectives and the objectives of child fund schemes of mutual funds. Child funds are launched with the explicit objective of helping parents build a corpus. Sample this – one of Mutual Fund company’s Children Career Plan’s investment objective reads – ‘to provide children, after they attain the age of 18 years, a means to receive scholarship to meet the cost of higher education and/or to help them in setting up a profession, practice or business or enabling them to set up a home or finance the cost of other social obligations.’

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 distinct plan in place for each objective and to allocate resources accordingly.
  • 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. It pays to be actively involved in the entire financial planning activity. Your participation will not only ensure that you are unambiguously aware of how your portfolio is progressing; it will also keep the financial planner on his toes.

Don’ts of Planning

  • Don’t delay the investment activity Starting early will enable parents to gain from the “power of compounding”. Say families X and Y are planning to create a corpus that will provide for their respective children’s education expenses 20 years from now. Family X, being the more proactive of the two, starts investing Rs 10,000 every year. Family Y starts the investment process after 10 years. However, to make up for the lost time, family Y decided to double the investment amount i.e. they invest Rs 20,000 per annum for a 10-yr period.
  Family X Family Y
Amount invested (Rs per annum) 10,000 20,000
Tenure of investment (years) 20 10
Returns (% per annum) 8 8
Maturity amount (Rs) 457,620 289,740

The substantial difference seen above can be attributed to the fact that family X had longer investment tenure and hence could enjoy the benefits of compounding. Family Y failed to match the corpus accumulated by family X, despite having doubled the investment amount. 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.

How to Teach Children the Value of Money

It is unlikely that a kid will learn to manage her money until she formally takes up a career in finance. Here is what you can do in your own little way to ensure that your kid isn’t completely at sea when it comes to managing her money.

It’s never too early to start : Explain the benefits of saving money over time, and how it can provide them with the power of buying something in the future that may be well beyond their means today. Introduce them to the concept of monetary ‘limitations’ and how saving is the best way to avoid them.

Who makes money? : In every child’s head, parents are a sort of discretionary mint that decides when to grant some money and when not to. Explain the concept of ‘salary’ to them by giving them a nominal monthly allowance. Keep a tab on their weekly expenses, and let them learn their own lessons.

Show them how saving can be fun : Tell them how they will not have to pine for their favourite toy anymore, once they start saving money. Basically make them truly appreciate the merits of saving and financial planning.

Banking is an experience; let them feel it: Take your child to the bank. As soon as possible, get an account opened in their name, where they can personally experience banking.

Inculcate good shopping habits : Kids are very observant; they catch on to the smallest of habits and attitudes. If you are an impulse shopper, make sure you do not overindulge yourself in front of your children. As often as possible, make large or expensive purchases seem deliberate and planned. Rationalise purchases in their presence so that they understand the usefulness of it.

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.


♠  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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