Sakina Babwani | Mar 31, 2014, 06.05AM IST | Times of India
One of the happiest moments for any couple is the arrival of a child. While revelling in the joy of the newborn baby, many forget the impact this event will have on their finances. Apart from a rise in the day-to-day expenses on various items like food and clothes, couples need to factor in a higher cash outgo in the form of doctor’s fees, vaccinations, and the like. The savings kitty could even take a major hit if complications arise during delivery, which require the mother to undergo an operation. Moreover, the monthly inflow of cash can be affected if the mother quits work after having the baby. Therefore, it is of paramount importance that couples plan their finances carefully before planning for a baby.
Before the baby comes
Every couple must make some preparations before the child is born. If the wife has been working, the first thing to do would be to get ready to survive on a single income. If the mother takes a break from her job after the baby is born, then the family will be dependent only on the father’s income, the result of which would be increased expenses on a pared salary.
So, it is important to test yourself for a few months before planning the baby to make sure you are not cash-strapped after the child’s birth. “Try living strictly on one income for a few months,” suggests financial planner Charul Shah of Greshma Wealth Advisors. One spouse’s income can be invested in a sweep-in fixed deposit or short-term debt fund. This exercise has two advantages. Firstly, you will be able to check if you can actually survive on a single income, and secondly, it will help create a corpus that can be used to deal with the expenses related to the delivery.
If you are not able to manage your expenses with a single income, in all probability, you are not ready to have a baby or need to cut down on frivolous expenses, such as outings, movies, etc. Ideally, you should not only be able to manage your expenses, but also have a surplus every month. This is because your monthly expense will naturally rise after the baby is born.
Find out about maternity benefits
The next step you need to take is to figure out the maternity benefits that your employer offers. As per the Maternity Benefit Act, any woman who has been working with an organisation for at least 80 days during the 12 months preceding the date of her expected delivery is eligible for a paid maternity break of 12 weeks, either before or after delivery. However, she cannot take it for more than six weeks before her expected delivery.
You can check with your human resources department if you can club your pending sick leave or other paid leave along with the maternity break. Some companies also offer women unpaid sabbatical from work after the birth of the child. This works well if you plan to resume work after a slightly extended maternity break. Understand the company’s leave and maternity break policy before you go on leave. Violating the company’s leave policy can cost you heavily. You may lose your job or even end up owing the company money. This can be financially disastrous for the couple at a time when the expenses have shot up.
You may find those baby shoes you saw at the store irresistible, but it is best to avoid buying them as your baby is likely to outgrow them in a few weeks. Couples tend to spend a lot of money on items like baby clothes, shoes, toys and cribs. However, such expenditure is mostly a waste as it is of little use to babies who grow very fast. Typically, baby clothes and accessories are expensive, sometimes more than those for adults. A wiser approach would be to ask relatives or close friends to pass on used clothes. This would help you redirect the money to more important and useful items for the baby, such as food and diapers.
Also, avoid buying expensive toys for your newborn. Keep in mind that your child will not remember the stylish clothes you made him wear when he was three months old, but buying good quality baby food will certainly ensure that your child remains healthy.
Get life and health insurance
When 35-year-old Parameswar Biswal was expecting his first child with wife, Itishree, the first thing he did was to take a term plan of 1 crore. “As I am the sole earning member, I had to ensure that my wife and baby were protected against unforeseen calamities,” says the Delhi resident.
Like the Biswals, every expectant couple must ensure that they adequately protect themselves. If you already have a life cover, you may need to enhance it. Check with your insurer if it allows you to increase the existing cover. If you have no insurance at all, make sure you buy one immediately.
Apart from the life cover, you also need to have sufficient health insurance in place since a newborn is susceptible to disease. You can buy a family floater plan and include the child in it or also buy an individual plan for the child.
Biswal went a step ahead while buying insurance plans. He also bought a 15 lakh cover for preservation of stem cells. If the cells are destroyed before his son attains 21 years of age, he will get 10 lakh as well as 5 lakh for any treatment that is required. “As a doctor, I understand the importance of stem cells. Therefore, I have taken insurance for their preservation as well,” he says.
Formulate an investment strategy
Raising a child is not a cakewalk and the cost involved can be tremendous for a middle class couple. Even an elementary college graduation and taking care of a child’s basic facilities like food and transportation can cost a couple close to 50 lakh, after accounting for inflation. If your child is dreaming of a professional degree like engineering or medicine or plans to go abroad for higher studies, then the cost can skyrocket. To take care of such long-term expenses, you should start planning from the day the child is born. In fact, many young couples start planning even before the child is born.
Start by devising a long-term strategy keeping in mind the child’s future goals. You do not need to start investing massive amounts immediately. You can start with a small amount, and as you near the goal, you can increase your investments gradually. For instance, if you want to build an education fund of 50 lakh after a period of 20 years for the child, a monthly amount of 5,054 will suffice, given that it is invested in an equity instrument that will yield 12% annually. If you can’t invest 5,000 immediately, you can start with 2,000 and increase the amount in the coming years.
Make sure you define your goals clearly and earmark investments for them as this gives you a clear base to build on. Once you have a clear idea of how much you need for each goal and the time period at hand, you can zero in on the appropriate investment products. Ideally, the product you choose should depend on four factors: tenure of the investment, the risk you are willing to take, the returns offered by the option, and the taxability of income.
“Typically, for a long-term goal, that is, a goal that is more than 10 years away, equity is the best option. Since the goal is several years away, it allows you to take risks,” says Sumeet Vaid, founder and CEO of financial planning firm, Ffreedom Financial Planners. If, however, you are not sure about investing in direct equity, you can opt for mutual funds. Take the help of a financial planner who can assist you in assessing your risk profile and choosing the right investment strategy.
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