Bangalore-based Kavitha and Rahul Bafna, both 32, are expecting their second child in March 2015. Diti, their first child, is 8 years old. Kavitha, a homemaker and Rahul, an analyst with a financial planning firm, are wiser this time round. Says Kavitha “From our experience with Diti, we know the importance of investing early, especially for education expenses, as those costs are increasing.” A new addition to the family is associated with additional expenses, and planning early helps. Here’s what to keep in mind.
Maternity costs. Health insurance that offers maternity benefit covers the expenses only after a period of 2-4 years from the time the policy is taken. Also, most corporates provide health insurance to their employees, which covers maternity expenses as well. If you do not have such an insurance policy, create a corpus in liquid funds that will provide for such expenses. However, your health insurance will not cover all maternity expenses. Says Prakash Lohana, chief financial planner, Ascent Financial Solutions: “Check with your doctor about what can be a normal maternity bill with the hospital and how much can it go up in case of any complications. Increase your contingency fund.”
Planning in advance ensures that you are not left short of cash or get into a credit card debt to cover these expenses. The Bafnas have invested in liquid funds.
Increased costs. Costs are bound to go up after childbirth. If both husband and wife are working and, they do not have a support structure at home, they would need to plan for the cost of additional domestic help and day-care expenses when the child is slightly older. Says Neeraj Chauhan, founder and chief financial planner, The Financial Mall, a financial services firm: “The couple should provision for these expenses and must ensure continuous flow of income during this period.”
Career break. In case you are working, you might want to take a career break to look after your child. Says Lohana: “While taking a career break, a woman has to plan. She should be clear about the period for which she will take a break. That done, she should figure out how much she will be contributing to the household expenses, insurance premiums, equated monthly instalments (EMIs) towards loans and, other long-term goals, such as retirement and child’s education during the time she will not be working. Once these figures are calculated, one should create a separate fund to meet these cash outflows by investing regularly in recurring deposits (RDs) and debt mutual funds.”
Insurance review. A child means an added member who is dependent on your income. So, life insurance for both parents if they are working needs to be enhanced appropriately. Life insurance should be reviewed even as the child is being planned and not after the birth of the child. Says Lohana: “They should increase the life insurance with a need-based approach, considering increased monthly expenses.” Adds Chauhan: “One common mistake parents make is buying life insurance for the child and not for self.” Rahul is looking to enhance his term plan of `1.25 crore. That said, do not forget to include your little one in your health cover. Normally insurance firms will cover your child only when he or she is at least 90 days old.
Plan long. In the excitement that follows a new addition to the family, parents forget to think long term. Says Chauhan: “The power of compounding is too important to ignore. So, start investing for children’s future goals.” Education costs are increasing at a faster rate than overall inflation, and though it is difficult to predict accurately, your child would need a large sum of money for his or her higher education. Says Lohana: “Predict them on a higher side, consider inflation impact on this cost and do proper asset allocation.
Allocate more to equity and less to other fixed income securities. Start providing from an early stage and review your goal, portfolio and asset allocation and performance yearly.” Starting early makes large goals look manageable as one has to invest small sums every month. When it comes to a new addition in family, nothing can be truer than this.