No set quantity or formula exists for this. However, an emergency fund should last at least a year.
What Are the Best Financial Tips for First-time Parents?
Being a new parent can often be quite challenging since parents are accountable for another person who is entirely dependent on them for everything. Parents need to be attentive and cautious of their actions since it affects the infant in terms of upbringing and health.
Here, we will delve into the required financial tips for first-time parents since they must make necessary alterations to their financial strategies to meet ends and guarantee a safe future for their child.
Financial Tips for Parents to Build a Future for Their Children
1. Set Up a Monthly Budget
A child's addition to a family significantly raises its monthly expenditures. Hence, the first step in financial planning for new parents is developing and planning a monthly budget. It helps to:
- Monitor and analyse monthly capital flow.
- Determine areas with excess spending and, accordingly, cut down on costs.
- Respond swiftly to alterations in financial situations.
Reducing savings, assets and investments to boost the budget is far from ideal. Instead, parents should analyse their monthly budget and modify it according to their present needs. Parents may curtail personal expenditures to cover additional costs related to the infant's well-being.
2. Bolster the Emergency Corpus
An unforeseen emergency can burn through the parents’ savings and income. Therefore, emergency funds safeguard children and parents alike in the event of unanticipated financial crises, such as:
- Unexpected medications or tests
- Post-childbirth therapy and more
Parents should pre-plan and boost their emergency funds while expecting since costs rise after childbirth, but income remains the same. Upon establishing the emergency corpus:
- Do not spend from the reserve.
- Allow funds to develop and grow organically.
The emergency fund should suffice for the upcoming 1-2 years of expenses post-childbirth, including applicable premiums and EMIs.
3. Expenditure Management
Follow these pieces of advice to manage parenthood-related expenses:
- Spend Wisely: Working parents may spend more than they should, since the early days of a marriage, the responsibilities are negligible. However, they must do relevant cost-cutting where possible and limit their leisure expenditures while expecting.
- Cost Calculation: Parents must calculate and segregate their expenditures to save for the future and prioritise pregnancy-related expenses. Calculating expenses can be highly beneficial for nuclear families since they typically lack financial support or backup.
- Postpone Major Expenses: One should put Major expenses, such as buying a new car or going on exotic vacations, on hold until the child's future is secured.
4. Debt Management
Debt management is a crucial aspect of financial planning for single parents. Inherently, debts are not worth worrying about as long as they are timely repaid. Repaying debts on time can help:
- Retain access to other debts and funds when in need.
- Build a strong CIBIL/credit history and score.
- Avoid accumulating debt burdens that adversely affect the infant’s future.
Parents should aim to do the following.
- Keep a debt-to-income ratio lower than 40%.
- Prevent defaulting at any point during the debt tenure.
- Avoid falling for debt traps.
- Borrow debts only when you can surely repay outstanding dues.
5. Consider Investing in Insurance Policies
Life is unpredictable. Thus, parents must protect themselves and their children from mishaps or unfortunate events. The objective of having robust health and life insurance coverage is to provide financial support and a quality lifestyle to the children.
- Term Insurance Policy
- Term insurance is a type of life insurance that provides financial coverage for the beneficiary’s family after their death:
- Parents should alter their term life insurance coverage according to the change in needs after the child is born.
- Premiums will increase, and so will coverage and benefits since factors like the child's education and wedding must be considered.
- Parents can opt for a 2nd term life insurance plan if needed.
- Health Insurance Policy
- Health insurance can be done for children above the age of 90 days:
- Since health insurance cannot be bought for children, parents must include their wards' names in existing health policies.
- Parents without health insurance can purchase floater health coverage for the whole family and include their child's name
6. Create a Savings Account for Your Child
Parents can inculcate money management principles in their children by simply opening a bank account in their name. Various banks allow for the opening of savings accounts for children over three years of age.
Upon establishment, parents can periodically deposit a rational quantum of money to serve as their child’s piggy bank. One must teach the fundamentals of financial planning and money to children as early as possible to make them more responsible and contribute to the family upon achieving financial stability.
7. Guardianship and Will
In the event of the parent's demise, deciding on guardianship of the child is critical. The future is unclear, so parents must secure their children's well-being. Hence, it is essential to have a valid will and legal guardianship in the parents’ absence.
A will is a written contract that protects a child's financial rights, guardianship, and future in the absence of the parents. Without a written will, safeguarding a child's financial future is pointless. Thus, parents must write wills for their children, guaranteeing that their assets, money and possessions are passed onto their ward.
8. Consider Investing in SIP
Parents should consider investing in a Systematic Investment Plan (SIP), which is a way of investing in mutual funds in small, regular instalments.
Furthermore, parents can initiate a SIP in their child's name in gold ETFs, debt and equity mutual funds, or Public Provident Funds (PPF) to achieve long-term goals. These are wise choices since the return on such investments is determined by the equity markets' success.
9. Building a Retirement Corpus
No parent wants to become a burden to their child upon retirement. Hence, building a retirement fund is crucial. Here are a few tips for creating a robust retirement corpus:
- Invest money in a solid and appropriate retirement plan.
- Begin low and raise the quantum progressively each month.
- Investing earlier results in a greater retirement corpus.
- Estimate how much capital is needed post-retirement.
- Alter current capital flows according to priorities.
- Reserve some funds for the retirement plan.
With improving financial conditions and children becoming self-sufficient, utilise the retirement fund to lead a hassle-free post-retirement life.
10. Taxation Planning
Nobody wants to pay extra taxes. Thus, tax planning is vital. Parents wishing to save on taxation should do adequate pre-planning, invest smart, and claim applicable rebates:
- The Income Tax Act of 1961 states that all Indian taxpayers can claim exemptions for certain child-related expenditures.
- Under the Income Tax Act's Section 80(C), children's educational costs incurred in Indian institutions have tax deductions for tax-paying parents.
Expenses and Other Factors to Consider While Expecting Your First Child
1. Preparation for Infant’s Arrival
Parents must wisely allocate their budget for the following parameters:
- Buying apparel for the child
- Nursery set-up
- Renting or buying a larger property
2. Pregnancy-Related Expenses
These costs include:
- Doctor visits and consultations
- Taking care of the expecting mother
- Medical and healthcare check-ups and tests
Complications in pregnancy can significantly multiply these expenses.
3. Medical Expenses
Parents must pre-plan for the following expenses:
- Hospitalisation and Delivery: Booking hospital beds and going through the delivery process contribute to the most significant portion of the parents' expenditures.
- Vaccinations and Paediatricians: No parent wants to put their child's health at even an iota of risk. Therefore, for the first 1.5 years after birth, parents must frequently take their children to paediatricians for vaccination doses and health check-ups.
4. Work Sabbaticals and Maternity Benefits
Working mothers must apply for longer maternity leaves or even consider taking a sabbatical, factoring in pay cuts, if applicable. Furthermore, parents should check the following:
- Available work leave options
- Settlement and hospitalisation perks
- Post-maternity options and facilities
Save paid leaves for post-delivery.
5. Child’s Education
Parents should save up and plan for their child's education right from birth, which allows investments to mature and helps discipline the child.
Raising a child requires significant effort, and these financial tips for parents will aid in correctly raising a child. However, securing a child's future depends on the entire family's emotional and financial well-being. Therefore, men should support their spouses emotionally and financially during a temporary career hiatus. Husbands may also aid their wives in enduring their crunch period in a much more effective way by assisting in taking care of the obligations towards their family and parents.
FAQs about Financial Tips for First-time Parents
Mutual funds are one of the simplest investment options for new parents.
Yes, parents may enrol their newborns in existing health insurance plans.
Other Important Articles Related to Investments for Children
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
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