Family Budget: Consider Inflation while planning your Child’s Future

Family Budget: Consider Inflation while planning your child’s Future.

Let us today discuss one financial planning exercise. Mr. & Mrs. Sharma are living in a joint family having 2 children (Aged 10 & 5). Mr.Sharma is a Businessman and the couple’s annual Income is Rs.35 Lakhs and Monthly Expenses are Rs.20,000. The couple wants to build a corpus of Rs.20 Lakh for each of their sons when they turn 18.

Now, let us plan their budget in simple and easy to understand method. As we know that the couple falls under the above average income group. So it won’t be much difficult to plan their family budget. Here is a step by step planning for this Couple.

Step: 1 Build an Emergency Fund -

This is the most important step. An Emergency fund should be 6-12 months of expenses that primarily deposited in the savings account. Emergency fund is necessary for several kind of emergencies. According to monthly expense of the couple, Rs.3 Lakh of Emergency fund would be sufficient.

Step: 2 By a Term Life Insurance Plan -

The couple should buy a Term Life Insurance policy for whole of their policy.

Step: 3 Never go for ULIPs & Insurance + Investment Products -

The couple is advised to stay away from the ULIPs and other investment products from the Insurance Companies.

Step: 4 Start SIP in Equity Diversified Mutual Fund -

It advisable that to meet the goals of Rs.20 Lakhs for their 2 sons, the couple should start investing in the good equity diversified Mutual Funds.

Step: 5 Consider Inflation while planning your Future -

This is very important. Mr. & Mrs Sharma wants to give their 2 sons Rs.20 Lakhs when they turn to 18. Now, They want to give today’s 20 lakhs to their children. And if we consider the inflation rate of 6% than the amount they need after 8 & 13 years would be around Rs.31,87,000 & Rs.42,65,000. So keep in mind the Inflation factor.

Step: 5 Expect Realistic Returns from Equity -

Always Expect Realistic returns from the Equity. You can expect 15-20% return from the Indian Equity in the long time run and 10% from the Developed markets like USA. So Start SIP accordingly. Don’t expect 40% return from Equity just because in the last decade it has appreciated this much.

Step: 6 Aim for an Equity:Debt allocation of 60:40 -

They can go for 60:40 allocation in Equity & Debt.

Step: 7 Invest for your own Retirement -

Don’t forget to Invest for your own Retirement. Start with 1 Lakh of monthly SIP. And the couple with end up with good retirement fund after 25 years, may be around Rs.10 Crore with 10% CAGR.