Giving your children their pocket money is a great way to help them learn how to manage money. However, there is also need to plan your children’s pocket money to avoid the excess burden you may face in your mid age. After all, why to give money from your pocket and bear the expenses of your child which you can easily plan it today itself? Why to add more liabilities in your life during your mid age where you can generate debt-free pocket money for your children? Every parent has to bear the expenses of their children till the time they do not get their first job. To avoid this burden, you should start planning form today.
Here is one of the way to plan for pocket money
When your kid is 1 or 2-year old, start investing, say, Rs 1000 for their pocket money when they reach the age of 16 or 17. It is the time when they start doing their graduation where their expenses grow immensely. Therefore, investing Rs 1000 a month for 15 years at 16 percent return in equity mutual fund will generate a corpus of about Rs 7 lakh at that time. Redeem all the money from that equity mutual fund and invest it in debt instruments like fixed deposits or any other instruments where you can earn a risk-free return of 7 percent.
Keeping other factors constant, if you invest Rs 7 lakh in a bank FD at 7 percent return, you will get an annual return of Rs 49000 which when calculated on a monthly basis will give you approximately Rs 4083. It can be a sizable amount of pocket money which you can give to your children during their graduation days.
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Moreover, this way you can also save the principle amount which can be further used in many activities, say your child’s wedding planning or any other future financial goal of your life. However, one must note that the interest amount will be taxable while filing income tax declaration during the financial year.
A few things which one should keep in mind while planning for any goal:
- The goal should have a specific time horizon and a purpose attached to it.
- Dedicated savings should be done towards a financial goal.
- Know all the tax implications while planning specifically towards a goal.
- Regular review of funds should be done till the time your money is invested in a particular scheme.
- Keep in touch with your financial adviser at every regular interval of time.
Planning towards a goal requires a long-term projection and full involvement by keeping a regular check and update of your funds’ performance. One should also know that there are any number ways to plan for a financial goal. The above illustration is one of the simple concepts to make you understand how easily one can let one’s money grow over a longer period of time.
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However, while investing money in mutual funds, you should know that returns are market linked and are not guaranteed at any given point of time, whereas in case of debt instruments, rates are decided by banks as per various factors like CRR, SLR, monetary policy, G-sec bonds performance and so on. These rates also change from time to time as per the banks’ requirement.