Becoming a parent is a wonderful thing, but as we know it comes with responsibilities and whilst there are many responsibilities that are not financial, I would like to share some key thoughts from my experience in financial planning. I write this as a father and a husband and hope these 5 Essential Financial Considerations Parents help in some way.
I would start with the observation I made when becoming a parent. We are sons and daughters, brothers and sisters, class mates, team mates, co-workers and so on, we have many of roles in life. However, being a parent is one role that when we take on will remain (barring tragedy) for the rest of our lives. Even in our 90’s we will still be parents…how good does that feel right!?
Let’s start then with a practical list of things we can do when our children are young. Use this introductory post as a check list, a precursor if you will, and in my future posts I will unpack each point in greater depth.
- Make sure you have an up to date will. If you have an existing will, pre-children, it will often be OK on most points, except for one – guardians. Marriage will invalidate a will, so if you have not updated it since getting married then you need to redo this as soon as you can. You will want to make sure you have thought through the guardianship and have that documented. Not having guardians can see your children placed in care until your relatives work out what to do, especially if the intended guardians are based overseas.
- Make sure you have enough life cover. Most people protect their mortgage, and may have death-in-service from work. Life cover is generally affordable, and whilst you hope to never claim on it, if you do the expenditure on life cover will be the best money you ever spent. I am happy to pay for a beer with you as consolation for the premiums you have paid for a policy that you never claimed on because you are still alive! In my next article I will lay out a model that allows you to properly quantify how much life cover to get.
- You have done the life cover and the will, now what? There are a few other essential items on the list for ensuring that money goes to the right places when it is needed. These are ensuring that your income continues if you are ill, but not ill enough to leave this third rock from the sun. If you did expire, where does the life cover, pensions and so forth go? When should you use a trust and how do you deal with pension death benefits. Not a sexy topic, but like most financial planning – if you think it through before it happens you are certain to have a better outcome.
- Focus on your finances, not the child’s. There are a lot of new savings vehicles for children out there, most are good but with two negative side-effects. Firstly they divert money away from parents who have not thought through their planning work properly. It is entirely possible to fund the children’s financial well-being without having left enough room to save for your own needs. Secondly, for parents who cannot afford to set aside money into these types of products they can create a sense of guilt. Guilt is never a productive feeling with finances.
- If you are saving for your child(ren), make sure to do it in a way that has impact. Many people like saving for school fees or university costs, this is absolutely fine but in a lot of cases the period to save is relatively short and you cannot afford to take too much risk. Hence the potential growth on the investments will be limited and you definitely do not want to take too much risk. Compare this to saving money in either your or even their pensions, where you are looking at half a century or longer as an investment time horizon. Over my career I have also grappled with some interesting dilemmas, do you buy the more expensive house in the catchment area for the best state school or do you live in a cheaper house but spend the money on school fees? Do you spend the money on school fees or start a property portfolio for the children to inherit to secure their future?
This is by no means an exhaustive or prescriptive list, but it is a start and if you can put a tick in each of these boxes you are going to be fine or at least not far off track. There is a boat load of financial marketing and noise to get through and ideally you should try to cut that out. Financial services companies make money by selling you things, sometimes you need the things they are selling, but make sure you put yourself in the driver’s seat when it comes to whom and what you engage with.
I am writing with 15 years’ experience as a financial planner, having seen good, bad and downright ugly practices. Over the next set of articles we will dig into each of these topics so that you can get enough information to make a good decision at each turn.