As parents, all of us want to provide the best possible financial future for our children. A lot of our financial planning is focused on leaving as much wealth to the next generation as possible. In doing so however, there are certain common mistakes a lot of parents make that need to be avoided.
Let us look at the ten most important of these:
1. Lack of estate planning
Every parent must write a Will. This is something that a lot of Indian parents however fail to do, and as a consequence, families spend decades locked in legal battles over property and jewellery and so on. It is absolutely essential that a clear, legally tenable will be prepared and regularly updated – that is every parent’s responsibility to his or her children.
2. Not updating nominee details in Banks and Employment records
After you are gone, your children have the right to your funds lying in PF accounts, Gratuity and even your Bank accounts and Demat. But if you never update the nominee details in the records of your employer or Bankers, your children will have to go through a lengthy legal process to claim ownership of funds that are theirs by right.
3. Putting too much money in gold
A peculiarly Indian tendency is to put away almost all their excess funds into buying gold, usually in the form of jewellery. It might have been a sound investment before Banking became widespread in India, but in this day and age, gold should not form more than 10% of a portfolio. In order to save for your children’s future, putting money into wealth-generating assets including stocks and bonds is strongly recommended.
4. Inadequate insurance
Too many Indian parents are insured for less than what they should be. We have covered this subject elsewhere on this site, but broadly speaking, you should be insured for a sufficiently high amount that, by investing it, your children should be able to live a reasonable life until they are able to earn for themselves. Too many Indian parents buy insurance as a tax-saving instrument and fail to provide adequate cover for their children.
5. Concentrating on saving rather than wealth growth
The focus for adult Indians is to save money with a goal in mind. While this sounds correct, the fact is it can lead to underutilisation of available resources. Putting money into a debt scheme aimed at raising money for a child’s education is a good idea, but you might be better off balancing it with some high-growth investments to reap more benefits.
6. Not reviewing investments
The potential and necessity of investments changes over time. Shares and Mutual Funds especially can go from profitable to deadbeat rather quickly – especially the former. When building up an investment portfolio, parents often forget to constantly re-balance it, ensuring that their children have access to the wealth they deserve.
7. Leaving money idle in Banks
A lot of Indians leave money in ‘safe’ havens like Bank FD’s. The fact is that there is nothing ‘safe’ about Bank FD’s because at present inflation levels, the 7-8% interest that you get from the Bank is not worth it at all. Your money should always be working for you – and your children’s future
8. Not saving enough for retirement
In this day and age, depending on your children to look after you in your old age is imposing an unnecessary burden. You would be better off saving enough money to ensure your own fiscal independence so that your children can focus on forging their own future.
9. Lack of insurance of a non-working parent
Even when we do take insurance, it is only on the life of the working parents. This reflects the incorrect assumption that a non-working spouse has no impact on the financial wellbeing of the family. In fact, it is just as important to insure both parents to ensure that in case of an unfortunate incident, you can provide for childcare and other things that were the domain of the deceased.
10. Overlooking your children’s financial education
We provide all we can for our children’s technical education, for school and college, but it is just as important to inculcate in them habits of financial prudence and make them aware of the importance of money. Only then will they be able to grow their wealth and fulfil the expectations you have cherished for them.