Planning your children’s future

It is very noticeable in Sri Lanka that the priority for parents in saving money means college education for children. It seems very natural. This is evident by looking at the number of saving accounts that are opened with the children’s names in every bank.

Does this give parents the false sense of security and thus neglect the rest of their financial goals? It is time to challenge this mindset.

Parents have no idea what their priorities should be and where they should start. A lot of times they do nothing and when they do take action they focus so much on planning for children’s education that they completely ignore the retirement need and other similar goals.

Also for most of them, their immediate everyday needs and desires of their families often get more attention than college saving too. So the first in the agenda is everyday needs and desires and second its college education. Needs like retirement, health care and estate planning are far from their minds and not given any attention at all.

I have found that most of the families are at least willing to put aside part of their income to children's education. But a majority too spend, without planning or financial awareness, on celebrations such as festivals, outings, birthdays and vacations than saving for any of their above needs.

For some between the age of 30 to 40, buying a house can be the priority. They are starting a new life and they will put most of their income to do this. Naturally given a fixed income they will postpone saving for their later–to- come children’s education.

So, there is an “I-can–always–catch–up” thinking where first they get the house, then save for education.

But, everyone here has assumed that career progress as usual and the only working assets, the parents, continue to be healthy, productive and stable and growing income always forthcoming.

This rosy picture could change when things do happen and the family needs to keep going forward and that means daily living expenses don’t. In fact, expenses only grow. This risk has to be covered.

This affordable financial tool is called “Term insurance”. A much neglected financial tool for basic income protection.

To help parents prioritize their finances, an awareness campaign needs to be developed by relevant authorities.

Even in cosmopolitan sophisticated New York, surveys are still conducted regularly to raise the need for financial planning. If not, money goes to what we like before it goes to what we need.

Every time we think of saving for the future, we must understand it has multiple uses. Proper financial planning will evaluate all those needs than single saving –for- college needs.

The reason for the above theory can be explained easily by taking into account some examples of young couples who had a plan but was unable to see its outcome due to unavoidable circumstances that hinder their planning process.

A majority of them, who can afford, may have already bought an insurance plan but very often this was seen as a single need plan. These families set aside some money for one particular purpose. What we mean by financial planning is not asking them to set aside more money that may be difficult for most of them, but use the same amount of money, they used to save, in order to cover a wider range of needs by taking into account those events that can destroy their single need planning process.

The right way to look at financial planning is first by covering the risk. The young families today are typically successful professionals in their 30s and 40s with good educational qualifications on their resumes – yet they are still often left scratching their heads when it comes to creating a family financial plan or they indulge in their more pressing needs such as eating out, buying or upgrading their motor vehicles and taking vacations to exotic destinations. Their peers behave this way, and naturally they are also influenced and think this is normal. So an entire generation may not realize the consequences of a consumer oriented behavior.

Tips on financial planning

1.Adequate insurance cover

This protects the plan you are going to design for the future. It is the only way to avoid destruction, half way through of what ever the plan one has for him or his family. Your insurance plan should be designed to take care of that need.

That means the need is taken care of irrespective of your presence because most of the plans end once the planner is not able to earn due to disability or death of the planner.

In a simple way, it is to say that a house should be built on a solid foundation. Your insurance policy is the foundation for the future goals for your family.

Also it gives you some saving, if you can afford to buy an endowment plan. But remember to put the protection before saving in deciding the plan. Endowment is a plan with discipline, not a plan that is designed to withdraw cash. It is a high premium policy but accumulates saving for you.

How much insurance is needed?

The practical approach is at least 10 times of your yearly income, assuming you have covered your one time liability from mortgage policies.

Young parents often feel healthy and don't think they need to prepare for the inevitable by drafting a will. But it's a task they probably shouldn't put off. Younger people don't have death or savings on their minds -- at least not to the same extent that older clients do. But there are many stories of young people dying without a proper will and children left without anything till the estate is settled. It is time we change the perspective that a will is only for the rich and the old.

Without a will, who will decide children expenses, priorities and future planning for their education? A will is put in writing, so there is no confusion in future. If it is costly to do one, at least write them in a piece of paper as a guide line.

3. Take into account all future needs; Retirement, children’s education, medical bills, disability and death

Too often we have seen people plan for a single need. The reasons may be due to income limitations or complete ignorance. The planning for multiple needs is the way forward as one need is dependant on the other, so lack of planning for one of the above can destroy your entire plan. If a person can afford only a small amount of money, consult a person who is qualified to give you the proper advice how to balance your planning process by taking in to account all the needs with a limited income.

4. Inflationary fear

The most common objection among ordinary people is “It does not make sense to save for the future as the money value drops” the fear of inflation and the value of money being small in future. This is an equation that needs to be taken into account in your planning process and one has to be competent enough to calculate the expected inflationary trend to adjust his plans than to have negative approach on saving and protection. Here we have to calculate the present value of the future money and continue to review our plans or get a pure protection plan that can beat the inflation.

Keep financial planning always in your mind, may it be buying a house, going vacation, children education, investing your saving, using your EPF, even to take treatment for your health problems. This is because we have seen more often than not people building huge mansions but halfway through stop work due to lack of finance.

Then there others who send their children to international schools but find it difficult to maintain the fees all the way to advanced courses. Some spend huge amounts on vacations but find it difficult to pay daily utility bills or going to the best private hospital for treatment and getting indebted to pay the bills.

6. Disclose- Please do not be afraid to talk to your bank manager, insurance agent or stock broker, of your needs

If you do not disclose, what your needs are and how much you can afford, they will either underestimate you or over estimate you and in both cases you will be the loser.

If you buy an insurance policy for an amount that you are unable to pay till the policy period ends, you will lose out at the time of surrender. The break even point can be more than 10 years in some cases and some cases it could be even more than 15 years.

Do not make valuable decisions because of obligation. Never buy anything for your future because it is cheap or because you get more discount from the agent. We have seen very often how people got into trouble with investment schemes that promised high returns. There is no free lunch and when it is too good to be true, it usually is too good to be true.

We also have seen people complain after realizing they were sold the wrong insurance plan but the buyer’s decision was based purely on a relationship than a need.

It is your future, so no question is a bad question. Be an intelligent consumer by covering every detail so you can have a peace of mind that your future plans are secured well.