Plan to prosper
Proper financial planning is the key to financial security when your family starts to grow, says Riëtte Grobler
IT IS ENRICHING to have children, but don’t be fooled – it’s expensive as well. Planning ahead and having a sound financial plan can save you a lot of unnecessary expense and stress in the future, says Jonathan Brummer from SmugMoney, a financial planning service. “Having a baby is a big step and prospective parents should ideally sort out their money affairs before the pregnancy,” says Jonathan.
A new baby means new expenses; some immediate and some as the child grows older, say Charné van der Walt from Lemons into Lemonade financial planners. Charné says prospective parents should pay attention to these five aspects of financial planning: 1. Monthly budget changes. With a child in the house the family’s monthly budget will change. If you plan to have a baby far in advance, you have some extra time to save in order to cover some of these expenses, but certainly reconsider your budget as soon as you can if the pregnancy has been a surprise. Take everything into account that will have an effect on your income. New expenses include paying more for your medical aid as you will have an extra member. 2. Build an emergency fund. This can be an amount equal to three months of income (after tax and deductions). Otherwise set a goal that your emergency fund should cover at least six months’ worth of minimum costs. 3. Save monthly for education. But how much? Ask your broker to help you work out what education will cost from playschool to tertiary level. This calculation must take into account yearly increases and whether your child will attend private or government school. If you start saving even before the birth, you have 18 to 20 years to save. You don’t have to buy an educational policy – a cash savings account at the bank from which you can withdraw every month as your child progresses at school is adequate. Consider a more formal
savings plan for tertiary education though, such as a unit trust account. 4. Decide how your family will be taken care of if the breadwinner can’t earn anymore. Put adequate life insurance and disability insurance measures (a once-off amount if you are declared medically unfit to work) in place so that debt can be paid off, your family can maintain its lifestyle and so that there are funds for your child’s education and your monthly expenses. 5. Make sure you have a testament. Your testament has to change in two ways once your baby has been born. Firstly, a testament trust is usually included as children under 18 may not inherit in their own name. Also, trustees need to be appointed. This person will be in control of your child’s money until a certain age. Secondly, a guardian or guardians need to be named in case both parents die. Choose someone who shares your values and who can afford it financially.
In South Africa women are entitled to four months’ maternity leave. Employers are not legally required to pay you during this time. This is where your emergency fund will be useful! You are entitled to apply to the Unemployment Insurance Fund if you have contributed to it through a salary deduction, says Charné. “The amount your receive will depend on factors such as how long you have been employed and what the income was on which your payment to the fund was based.” You should apply for this money as soon as your maternity leave starts. If you resign, you can’t claim.
IF YOU WANT TO STOP WORKING
“Make some calculations ahead of time to be sure that you can afford to stop working and to have a plan of action, if this is something you’ve been considering. This could include moving debit orders to your partner’s bank account,” says Charné. “A plus point is if both parents’ cars are paid off and if you have no short term debt.” Take the following factors into account to decide whether you can take a financial risk: the size of the new breadwinner’s income in comparison to the loss of salary when you stop working; the extent to which the missing salary contributed to household expenses and other important expenses such as your medical fund, and also think about changes you can make to your budget, such as deliberately spending less on luxury items. Start doing this planning before your baby arrives, so that it doesn’t feel like such a shock when you can suddenly afford less.
THAT FIRST CAR
“If parents have a few extra rands in their budget after all the expenses have been dealt with, an investment in the child’s name is a good idea,” says Jonathan. “This can help your child buy a car later, or even put down a deposit on a property.” He discourages parents from opening a tax-free savings account in their child’s name, though. “A unit trust account is a better option, as with that they are not deprived of the advantage of the account once they start earning an income.” TIP: Jonathan says that tax-free savings accounts are a better option than educational savings accounts, as the latter often come with higher fees and fix periods and penalties if you want to change anything.
REMEMBER ONE DAY
✓ Retirement fund. “If parents stick to their retirement goals, it means that they do not put financial pressure on their children in later years,” says Charné. If your planning for your senior years is lagging a bit, Jonathan suggests that you increase the monthly amount that you are currently saving. ✓ Life insurance. “We use our assets and income to pay for our expenses and to save and plan for other goals,” says Jonathan. “The goal of life insurance is to make sure that these goals can still be achieved even if both parents were to die. As a basic guideline you need 15 to 20 times your yearly income as life insurance.”
BYE-BYE NEW CAR
Whether you can still afford a new car, or do renovations to your house once baby has arrived, will depend on how financially secure you are. This means that you have no running or short term debt, you have an emergency fund, and you live approximately 30 percent below your income level, says Charné. Jonathan adds that a good financial plan is your best asset. “A financial plan is a process by which you find out what your goals are and how you should proceed to achieve them. It calls for a disciplined approach where short and long term goals are weighed up against each other.” Try to include a bit of spoiling money in the budget, such as an evening out while granny and grandpa babysit, says Charné. “Talk openly and in a positive manner about your financial dreams. Keep your dreams alive, even if you can’t afford them right now.” YP