How To Save Money For Kids?
In ULIPs, the investment risk in the investment portfolio is borne by the policyholderU.
The Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Linked Insurance Products completely or partially till the end of the fifth year.
If you are a parent or guardian, chances are you have often wondered what the future holds for your child. Saving money for your child not only eases these concerns but also allows you to build a strong financial future for their education, life goals and other dreams.
If you are thinking about how to save money for your kids’ future, you are at the right place. Let’s find out more about how to save money for kids.
Why is it important to save for your child's future?
Saving early can have a lot of benefits for your child in the long run. Let’s explore how:
Rising education costs
Education inflation is at a high, and the cost of education is only increasing with time 1. Saving for your child can help you prepare for these rising expenses, which often require long-term planning and investments in instruments that can minimise the effect of inflation.
Medical and emergency needs
Unplanned and unexpected medical expenses can drain your finances and may even lead to bankruptcy in extreme cases. Saving for your child’s future healthcare needs keeps you prepared for such situations, while also ensuring that your child gets the best treatment and medical facilities when needed.
Creating financial security
Saving for your child offers them financial security and supports them during key life stages, such as going to college, relocating to a new city or country, getting married and so on. These milestones often require financial backing, and early savings can help you extend the necessary support to your child when they need it.
Instilling financial discipline in children
Saving for your child can also have a ripple effect on their own financial habits. When you share your savings plan with them, it helps them understand the effort you are making and encourages them to be more disciplined. They may also start saving in small ways and contribute in their own capacity.
When should you start saving for your child?
Ideally, you should start saving as early as possible, preferably right from birth. Delaying this task can cost you money and may even take away the opportunity to build a stronger financial cushion.
Importance of starting early
Starting early allows you to contribute small amounts regularly and still build a sizeable fund over time. It reduces the financial pressure on you and makes a big goal feel much more achievable and realistic.
Benefits of compounding over time
Compounding works best over the long term. For example, if you invest ₹ 1,000 per month at an annual return of 7%, you will have approximately ₹ 1.7 lakh in 10 years. However, if you invest the same amount for 20 years, your corpus grows to nearly ₹ 5.2 lakh. The longer you stay invested, the more you can earn.
How milestone in life affect planning
Starting early gives parents the advantage of planning for major milestones in a structured way. You can begin by saving for birth-related expenses, followed by school fees, extracurricular activities, healthcare costs and eventually higher education. Having a long-term plan in place helps you stay prepared at every step.
What are the best ways to save money for your child?
If you are wondering how to save money for your kids' education and other goals, you can use a variety of tools, both traditional and market-linked. Below are some options:
Open a dedicated savings account
You can begin by opening a dedicated savings account for your child’s expenses. This can be a joint account with your child or even a minor savings account in their name. Having a separate account helps keep things organised and ensures that your child’s needs do not get mixed up with other financial goals.
Invest in a Public Provident Fund (PPF)
A PPF can be a suitable long-term savings option that offers tax benefits. You can claim deduction of up to ₹ 1.5 lakh per year subject to conditions prescribed under Section 80C * of the Income Tax Act, 1961. Although it has a 15-year lock-in period, you can extend it in blocks of five years after maturity. The money grows at a steady, Government-declared rate.
Use a Recurring Deposit (RD)
An RD allows you to deposit a fixed amount regularly and potentially earn a steady return over a specific period. It is a low-risk savings tool, suitable for medium-term goals. At maturity, you receive the lump sum, including interest.
Start a Systematic Investment Plan (SIP)
SIPs let you invest regularly in market-linked funds. You can choose between equity, debt or hybrid mutual funds ~ depending on your risk appetite and investment horizon. Over time, SIPs can potentially generate returns and help you plan for long-term goals like higher education or studying abroad.
Consider Sukanya Samriddhi Yojana (SSY) for girl child
The SSY is a government-backed savings scheme specifically for a girl child under the age of 10. The minimum deposit is ₹ 250, and the maximum is ₹ 1.5 lakh in a financial year. It offers deduction subject to conditions prescribed under Section 80C * and the interest earned is also exempt subject to conditions prescribed under Section 10(10D) * of the Income Tax Act, 1961.
Child Insurance Plans and Unit Linked Insurance Plans (ULIPs)
Child insurance plans and ULIPs serve a dual purpose. They help you invest for your child’s future needs while also offering life cover`. In your absence, the plan can still support your child financially. Additionally, they provide tax benefits under Sections 80C* and Section 10(10D)* of the Income Tax Act, 1961.
Fixed deposits for children
Fixed deposits are a suitable option if you prefer low-risk investments. You can open a term deposit in your child’s name and potentially earn steady returns.
How can you build a strong savings habit for your child?
Below are some tips that can help you build a strong savings habit for your child:
Set clear financial goals
Make sure you set clear goals for your child’s future financial needs, such as education, marriage, healthcare and other major milestones. The more clearly you define these goals, the better you will be able to estimate future expenses and structure your savings accordingly.
Automate your savings
Automating your savings can help you stay more focused. It eliminates the risk of delays caused by procrastination, forgetfulness or other distractions. You can set up Systematic Investment Plan (SIP) auto-debits or automatic transfers to a dedicated savings account or any other savings tool.
Track and review progress regularly
It is important to track and review your progress regularly. This helps you stay on course and adjust your savings plan as needed to keep pace with inflation, your child’s changing needs and any new financial goals that may come up.
Involve your child in the process (age-appropriate)
Involving your child in the savings process can have a positive impact. It helps them become more mindful of money and spending habits. Over time, this also improves their financial awareness and prepares them to be more responsible in the future.
What are the common mistakes to avoid while saving for kids?
Below are some common mistakes you should avoid when saving for kids:
Delaying savings
Delaying the savings process can impact your financial goal. The longer you wait, the more you miss out on opportunities to save and earn returns over time. It also means you will need to contribute larger amounts later to reach the same goal, which can put more pressure on your finances.
Ignoring inflation
Inflation reduces the value of your savings over time. Not accounting for it can be a major mistake. It is important to include financial instruments that can mitigate the impact of inflation, such as market-linked tools, to build a portfolio that grows and keeps pace with rising costs.
Choosing insurance-heavy products as investments
While insurance-heavy products can offer some financial protection, they often come with lower returns compared to market-linked options. Relying too heavily on such plans can limit your financial growth. Instead, you should maintain a healthy balance between insurance for protection and investments for growth.
Not reviewing the savings plan periodically
Setting your savings plan on autopilot without reviewing it from time to time can cause you to lose track of your progress. Your child’s needs, inflation rates and your financial situation may change over the years. Make sure to revisit and update your plan regularly.
Conclusion
When saving for your child’s future, it is important to start early and choose a balanced mix of insurance and investment tools. This helps you stay ahead of inflation while also ensuring financial protection. Involve your children in the process and stay disciplined yourself to build healthy savings habits over time. Also, make sure you fully understand the tools you are investing in so that your savings align with your child’s future goals. The investment options listed above are subject to risk and change. They may also offer varying returns. Make sure to keep this in mind when saving or investing your money.
Take action today, and you will be one step closer to helping your child achieve their dreams tomorrow.
People like you also read...
