Planning for new born

Everyone says get married and have children. Children are a gift of god. But taking the current economic scenario, having children is not cheap. Do I sound too blunt? It’s better to do that then cry later. It all starts from the time of conceiving. What do I mean? As soon as you realize that the woman is pregnant expenses start.

First to the Doctor and doctors are not cheap, add to that the medicines and diet, till delivery and regular visit to doctors. So you thought everything was cheap, think again. First thing you need to start planning is medical expenses. Try and get a medical insurance which would take care of these expenses.

It would be difficult to get everything out of insurance. So you would need to plan for these expenses. Now let’s assume you have taken care of the first hurdle. The next step is after the child is born. Child care for a new born is not cheap; taking the Indian society and social pressure, the cost would just keep mounting.

First there would be the costs of Pediatric care, in the initial years. And do not forget the cost of sweets and party for the naming ceremony for the new born. It’s better to be happy about the child being born, than to keep cursing throughout your life. Start keeping some money aside to take care of these expenses.

So start a child fund, to take care of pre-delivery and post delivery non-reimbursed expenses for 5 years.

Scared? There is still more to come. The expenses mentioned above would be for around 5 years; this could be different depending on the circumstances. Now comes the schooling time. Please remember things change when a child is born. If both of you were earning, there could be circumstances where one would need to stop working, to take care of the child. Your income goes down, so don’t you think you should plan?

As soon as the child is born, start investing in a good child care mutual fund on a regular basis. This would start building the corpus for higher studies. As you are aware higher education is not cheap and the cost would just keep creeping up.
This may sound cheap, but you need to rethink.

Try bargain hunting for all items you purchase for the child, be it toys or clothes. Since in hardly 6 months the child would have outgrown the things you have purchased and people are too busy to notice. Spend big bugs only were needed, in all other cases bargain hunt.

Does your child understand a brand? No. Then it really does not make sense throwing out your hard earned money, just to please people. Your child will not even notice or know the cost of the items you have spent. Spend money on him/her when he notices and gives credit to you.

Don’t stop your baby fund, even if you are dipping into the baby fund for non-reimbursable expenses. These funds would help for the ongoing education. After that the higher education fund you have created would take over.

ULIP’s

Now a day’s, I should not be saying now a day’s but some months back, many insurance agents used to keep saying buy ULIP’s as an investment cum insurance. While the market was going up it made a lots of sense investing in ULIP’s. Definitely they were better than endowment or moneyback policies, which gave very low returns. In endowment or moneyback policies you do not have an option as to where your money would be invested.

The returns in ULIP’s are market driven and you have a choice of deciding where you would like your money to be invested, depending upon your risk appetite. Having said market driven, we need to understand how they work. Remember ULIP’s are long term investments.

In most of the ULIP’s you need to pay premium only for the first 3 years after that you can withdraw the money. But it is usually after 3 years that the real returns start coming.

One of the main drawback is in the initial 3 years the initial charges are very high, after 3 years the charges come down. So if you go by what the insurance agent has told you and invest only for 3 years and after that withdraw, you would not have got much benefit. If your plan was only 3 years, then mutual fund would have been better.

The advantage of ULIP’s is long term investment. Though in the initial years the administrative charges are high almost 25 to 40%, they start going down after the 3rd year. Here the administrative charges are even below those of mutual funds, which keep charging 2 to 2.5% every year. In the long term, these small charges make a big difference.

Another huge advantage with ULIP is most of the companies offer 2 or 3 free switchs per year between plans. Also you need to check if they have a feature like top up. In case you get a raise or bonus, and would like to invest the money, check if the company has a topup facility.

So seeing the advantages, what age bracket should go for ULIP’s? As we have seen, you need to look at it as a long term investment. Therefore assuming a retirement age of 60, the persons who should go for ULIP’s are persons upto the age of 40.
Remember the premium amounts for ULIP’s are quite high, so only if you are sure of being able to keep investing for 20 years, go for it.

Note that the charges I have written above are just examples. Check with the insurance company, before investing. In case the charges excluding mortality charges after the 3rd year are above 2 to 2.5% do not invest in it. In that case it would be better to go in for a pure term plan and invest the balance in a good mutual fund.