The Game Plan – Child Budgeting

This is an extract from Outlook Money – Kids Special, the Credit for this work should be rightfully given to them, also check www.outlookmoney.com for more such info and even read online all such articles. I thank Outlook for bring out such an interesting and a useful edition in Financial News that we all can use.

This was the budgeting I was talking about in my previous post, it is complex and the same magazine also contradicts its view especially when it comes to Child Plans & ULIP, anyways see how this can help you. I will highlight those that I think are critical in the below list and removed few which I thought was not required.

These are only views, please refer to your own research and planning before investing.

New Born

  • Increase Life Cover through a Term Plan
  • Increase emergency Money according to your new responsibilities & needs.

First 6 Months

  • Open a Kid’s Bank Account for cash gifts
  • Include your baby in your health cover
  • Make him/her your nominee in all your investments
  • Make a Will if you haven’t done yet
  • The Child’s income if any will be clubbed with a Parent ( Modeling )

Before 1 Year

  • Ideally Start a PPF Account in the Kid’s name
  • You can use money from the Kid’s Bank account as initial deposit
  • Make Growth Investment in Large-Cap Equity Mutual Fund via Systematic Investment Plan
  • Choose Funds with highest Equity Option
  • Begin giving Gold Coin or Biscuit as a regular Birthday Gift
  • If School Admission needs an lump sum, start salting away now in suitable debt fund and later in Fixed Deposits.

Year 2

  • There is still time to catch up on the Must-dos,
  • Try maximizing the PPF account
  • Continue with the Term Plan and the Kid’s ULIP
  • Deposits small amounts in Child’s Bank Account

Year 3

  • Your Family Income would have gone up now.
  • Catch if you are still lagging behind on the must-do’s
  • Continue the existing Investments
  • Try to Max PPF
  • Top up your Kid;s ULIP
  • Add to your MF Portfolio
  • Continue saving for School entry expenses

Year 4

  • Diversify the Kid’s Portfolio further by including stocks with a mix of Large, Mid & Small Cap Stocks that has performed consistently
  • As this portfolio and your other investments grow keep updating your Will so that is earmarks the assets the child to ensure seamless transfer in case of your premature demise :(

Year 5 & 6

  • Continue with older investments and invest parts of bonuses, dividends, and increments
  • Buy Gold ETFs if you haven;t done so yet, upto 2-5 % of the Portfolio
  • Augment Large Cap Stocks in the direct Equity Portfolio.
  • Buy a separate health cover for your child or bump up your family floater cover

Years 7 to 10

  • Continue bumping up the inputs in the existing investments by diverting parts of bonuses, dividends, and increments to the Kid’s Portfolio along with cash gifts

Year 11

  • Maintain the momentum in savings & investments.
  • Educate your child on Debit Cards & Cheque Book
  • Initiate her/him into online educational resources on money.

Year 12

  • Even as you continue investing, make your child money savvy by linking his pocket money to his savings account balance.

Year 13

  • With the Countdown for the use of Kid’s money on, start derisking the Portfolio
  • Begin moving from Mid Cap Stocks to Large Cap defensive Stocks

Year 14

  • Continue PPF investments
  • Update the Will regularly
  • Assess the Child’s needs for the next few years
  • Go for Fixed income and liquid option for re-investment.
  • Avoid long term avenues with strict lock-ins such as Ulips

Year 15-16

  • Systematically move 60% of the ULIP and MF Portfolio into Fixed Income options such as Long & Short term debt funds
  • Switch High Rish Equity to Low Risk debt based variants in the Kid’s Ulip.
  • Shrink the Stock Portfolio
  • First Sell aggressive stocks and then the defensive ones
  • Extend the PPF Account for next 5 years

Year 17

  • With Target age within striking distance, you would now know whether the money saved for your young truck would suffice
  • If you are falling short look at educational loans instead of tapping into your retirement funds

Year 18

  • Use Fixed Income options other than PPF
  • If all sources, including loans fall short and the markets are depressed make partial PPF withdrawals
  • Update Will
  • The Child’s income will not be treated as his/her own
  • Help and cultivate the habit of tax filing

Year 19-21

  • Assess Higher Education Needs.
  • You can seek one more extension of PPF
  • De-risk your portfolio further
  • Shift into debt funds and fixed deposits

Year 22

  • Investments made in the Child;s name can be passed on to her/him.
  • Use Gold Investment at the time of her marriage.
  • For investments that are in your name but made for her, make a plan for their transfer.
  • Keep updating your Will if you make further investments

……Well this was one of the Article in the book, I suggest this is a must read to all those who want to plan the finance for their kids.

Use this Link to Calculate the PPF Investments – I Prefer the II Option, http://www.personalfn.com/tax/calc/ppf.asp

Published in: on February 19, 2009 at 5:06 AM  Leave a Comment  
Tags: , , ,