Why is Recession the best time to open a savings account for your children?
It may sound counter intuitive, when every one is worried about salary cuts and losing job, who has the time to think about the future, leave alone the future of our children?
It is natural for the amygdala in our brain (that is responsible for fear and anxiety) to become overactive during recession times. There is no point in resisting it, because it is biologically and psychologically independent of our cognitive mind.
In a way this fear and anxiety of the future, is going to be helpful because it is going to force us to re-evaluate what is "essential" and what is "not-essential" in our lives. We will reduce on discretionary spends such as shopping, fine dining, vacation etc, and focus more on healthy foods, education and health care.
If you resolve yourself to put away a fixed % of your income every month for the future of your children, it is much easy to implement it now, given the fact that you are re-aligning your priorities and it is the best time to form new habits.
Since your resolve is not a fixed amount but a fixed % of your income, you can adjust what you put in to this long term saving, depending on your actual income. So even if you have a salary cut, or a period of jobless survival, putting away 5% or 10% of your monthly income for your children is not going to affect your ability to survive. (Unless you are in the Bottom of the Pyramid and struggling to get food on the table).
So I would argue, that there is no best time to open a savings account for your children than during a recession. You will prove it to yourself, that if you could save during a recession, you can save any time.
Now having decided to put away some money every month, what are the options?
Bank RD : The biggest risk in a Bank RD, is ourselves. We may open it for our Children or even in our child's name. But when it comes to maturity after 12 / 24 / 36 / 48 / 60 months, there will ALWAYS be some important expenditure waiting for that money. Now that most banks allow easy breaking of an RD with a click of a button, whether it will really survive its entire tenure, is itself a question mark.
Voluntary PF and NPS : It is a secure way to save for your retirement. The interest is decent. The maturity amount (with all that compounding interest) might look big on an excel sheet, but the biggest risk in this instrument is this. The "Purchasing Power of that maturity amount" is dependent on your Government's economic policies over the next 10-20-30 years. Most Governments borrow from the future, print more money to stimulate growth and indirectly depreciate the purchasing power of their currency. So you may be running hard, only to find yourself in the same place (like a tread mill) after 20 years.
Mutual Funds & Shares: Subject to Market Risks. Please read the offer document carefully before investing.
Paper Gold : Exchange Traded Gold Funds may look appealing because they are linked to Gold prices. But they are not really backed by Physical Gold and it can become worthless if there is a market crash and people default on their commitments. No one in their right conscience can recommend or guarantee Paper Gold as a 10-20 year product. May be OK, if you are parking some money in the short term. But for long term saving, I would always bet on Physical Gold than Paper Gold.
RBI Gold Bond: RBI comes out with an issue at least 6 times a year and is open for 4 days. It is denominated in Gold grams and there is a lock in period of 5-7 Years. You will get back your Money at the Gold price applicable on maturity date. It is not backed by Physical Gold, but you just have to trust it, because it has the Sovereign guarantee of the Central Bank and Central Government. This is ideal if you have some sizeable amount like 50K to invest. Not a very good option for monthly saving.
Physical Gold :
- Physical Gold is the most secure and 100% risk free long-term saving option. It is also inflation proof. When there are economic and political uncertainties, no wonder all the financial wizards de-risk themselves with some Physical Gold in their lockers.
- Gold outperforms (means appreciates more than) other similar risk-free financial instruments over 10 to 30 year time frames.
- The most important advantage of Gold is our emotional attachment to it. We will never sell Gold for anything except for Property, College Education or Jewellery. This means the saving will TRULY reach the next generation.
Physical Gold at home : If you can buy a 1 gram coin every month (Gold will soon touch Rs 5000 per gram), nothing like it. But if your monthly saving is in the range of Rs 500 - to Rs 3000, then you have to have the discipline of accumulating this money in a bank account and remember to go and buy a coin whenever it has gone past 5000. While it is easy to convert gold coins and bars in to Jewellery, selling it to buy a property or to fund college education requires extra time and effort because, you have to find a buyer who will take your Gold coins / bars and give you money in the form of cheque or bank transfer.
Chit Scheme of Jewellery Shops: This is a un-secured and un-regulated scheme offered by most Jewellery brands. Please remember, your monthly payment is rotated as working capital in their own business. So if you trust the brand and their financial strength, then you can chose this option. That is also the reason why RBI has limited the maximum tenure of these schemes to 11 months. So you have to buy some Jewellery at the end of 11 months. You can't carry forward to next year. Now if you are saving 2000-3000 per month, you will hardly accumulate 4 to 6 grams at the end of the tenure. So this option is mostly suited for people who can afford to save say for example 10,000 PM or more and buy some decent Jewellery at the end of the 11 month tenure. If you want to save 2000 PM in Gold for the next 10-20 years, then this scheme will not work for you. Another disadvantage of buying Jewellery every 11 months, is that, you spend on Wastage / VA / Making Charges. You also lose some % when you sell it back. If your objective is to save for your children's future, to buy property, or to fund college education, then buying Jewellery every year is not the best way.
Physical Gold at MCX (Direct) : Unlike Exchange traded Gold Funds, MCX Gold is actually backed by Physical Gold. MCX is the Multi-Commodities-Exchange where commodities like Gold, Silver, Copper, Aluminium, Cotton, Jute etc. are bought and sold. MCX is regulated by Indian Parliament through Securities and Exchange Board of India. (SEBI). The Gold that you buy and own in your own name, is actually stored in a SEBI approved, MCX Exchange controlled Warehouse Locker at Ahmedabad, with traceable serial nos. of the coin / bar that you own. You can take physical possession any time ( By paying for handling and postage) or sell it back in the exchange on any working day at market rate and get back rupees in to your bank account. Settlement happens for all sale transactions during a month, before the 5th of the following month. You can buy Gold Petal (Min 1 Gram or multiples thereof ) or Gold Guinea (Min 8 grams or multiples thereof). Gold Mini (100 Grams) and Gold (1 Kg) are meant for whole sale buyers.
milliGOLD : (Disclaimer : I am the founder of milliGOLD and have a vested interest in this option) - milliGOLD is also Physical Gold bought and stored at MCX. (We are not an authorised broker or AP for MCX. We are just a customer having an account with MCX to buy and store our Gold Stock).
How to start?
You can start by giving a monthly e-mandate / ECS mandate for anywhere between Rs 500 PM to Rs 10000 PM from your salary account. You should complete your KYC Documentation within 12 months or before your Gold Balance crosses 2000 milligrams, whichever is earlier.
If you have any specific questions or doubts, please feel free to reach out to us, through our Company Page on LinkedIn or through the Customer Service Whatsapp No in our website www.milligold.in