Four reasons to start investing in your child’s first year
Many dreams are born with the birth of your child. Typically, the bigger the dream, the more the money you will need to realise these dreams, whether it is higher education at a prestigious institution, or, a grand wedding. To ensure that all such dreams are realised, you need to start investing in the child’s first year even before the initial euphoria of parenthood has settled. Here are four compelling reasons for an early start.
Education costs have been rising
Costs, be it for school, college, university or some professional institutions, have all witnessed a sharp rise in recent years. While options in terms of institutions and higher education streams have increased, so have the costs. For instance, the costs of traditional higher education favourites, such as medical, engineering and management courses have actually shot through the roof. Take the case of the much sought after two-year management programme at the Indian Institute of Management, Ahmedabad (IIM-A). In 2005-07, the programme cost was only Rs 3.16 lakh and, 10 years later, the same programme costs Rs 18.5 lakh; an almost six-fold increase…and will keep rising in future.
Going by the steep spike in education costs in recent years, imagine your future financial burden for your child’s higher education if the costs continue to rise at such a fast clip. A course, which costs Rs 15 lakh today, would cost around Rs 42.81 lakh after 18 years if the annual inflation is assumed to be a mere 6%. Inflation in education expense is higher than the regular inflation. True, you have education loans to help you with but, it is unlikely that you would be able to cover the entire cost through loans. It is also not advisable to take recourse to loans as that will entail a huge loan repayment obligation towards the end of your work life. The outcome would be equally unfavourable if your child were to take the study loan, since it could take him years to repay. The best alternative is to start early, ideally in the first year of the child.
Child’s wedding will also cost you big. If you are planning to have a grand wedding for your child, you will need to start planning and investing for it from early on. For a wedding that costs Rs 20 lakh today, assuming an annual inflation of 6%, it will cost Rs 57.08 lakh in 18 years. Clearly, you will need time to raise that money as well as prepare your finances accordingly. Certainly, this, too, calls for an early start to investment.
Big targets require early starts. It is evident that your child’s higher education and wedding would require huge amounts of money. That said, you will also need time and a disciplined effort to accomplish this task. If you want proof, here are some numbers. If you need Rs 40 lakh in 5 years, assuming an annual return of 10%, then you would need to invest Rs 25 lakh today. However, with the same returns from investments, a monthly investment of Rs 6,700 for 18 years could help you raise the same amount of Rs 40 lakh.
Early start gives benefit of compounded growth
An early start to investments for your child’s future has two other benefits. First, it gives your money enough time to benefit from compounded growth. The following numbers bear testimony. Assuming that you invest Rs 6,700 per month in an investment providing 10% return, you accumulate Rs 13.72 lakh after the first 10 years. If you continue saving for the next 8 years, the money grows three times to Rs 40.23 lakh, with the invested money earning for itself thanks to the power of compounding.
It initiates you into a regular investment regimen
Second, an early start initiates you into a regular investment regimen early on, which is essential to take you to your savings target for your child.
To sum up, with the birth of your child, the not so evident truth that gets overlooked is that many dreams that are born can be given life only with adequate financial planning and investment efforts. There is no better time than the child’s first year to get started to turn the dreams into a reality.
The author is Chief Strategy Officer, IDBI Federal Life Insurance. The views expressed in this article are his own