What to expect (financially) when you're expecting

Here are five key considerations from Westpac Senior Financial Planner Diana Saad, to relieve some of the pressure - so  you can concentrate on your new bundle of joy.

Cashflow

For many, having children means a reduced household income and increased expenses, which leads to a cashflow squeeze. To prepare for changed circumstances you need to clearly map out your expected cashflow. You can divide that up into a few basic steps:

Prepare or revise your expense budget

The simple act of adding up your monthly income and expenses so you know where you stand financially can give you more certainty, which reduces anxiety. It can also help you prioritise spending to the areas that provide the greatest benefit. “A good idea is to group your fixed expenses like your home loan and utilities as these are your monthly non negotiables,” Diana says. “Then you can make smart decisions around which areas of discretionary spending you value the most.”

Where does all the money go?^ The cost of raising two children on an average income

“Yes, the costs are significant,” Diana says, “and you will have to think about how to alter your finances in line with these additional expenses. It could be making sure you cut down on impulse purchases and wasted food. It might be going for a job with a higher income, and taking advantage of government benefits (like the Child Care Rebate). You can also explore the free resources available to you, like recreation at the beach or the park. You might look at an investment plan, to generate income over the long-term to meet some of these expenses.”

At this stage, you might also consider whether you'll need a bigger car or house; or whether you might want to move to a more child-friendly area.

Decide whether you'll continue to work

Should one parent stay at home? Or can the income benefit of continuing to work outweigh the child care costs?  “You also need to consider the loss of government benefits,” Diana says. “For example, the Family Tax Benefit Part A & B and the Child Care Rebate may be lost due to the additional income earned from the second spouse working.” Your financial adviser can help you model some projections for both options; and even do a cost-benefit analysis.

Review the mortgage

At this point you might consider moving at least part of your mortgage to the certainty of fixed interest rates, if you wish to be more certain of your mortgage payments. You might also consider refinancing to improve cashflow. Again, you might seek the advice of a financial expert to help tally the costs and benefits of each option. 

Putting money aside

When you're preparing for your first child, it's wise to put as much money aside as you can, to help with the added expenses. Setting goals for savings helps. You might set a $5,000 target for your baby nursery fund, $10,000 for an education fund, or you might put aside a percentage of your net income (say 20%). Any lump sums you receive at this time can be set aside as well.

Making the most of government assistance

Make sure you understand the rules around the entitlements awarded by the various government schemes, and how they can affect your cashflow.  Benefits change from time to time but may include:

• Family Tax Benefit Part A and Part B: you may be eligible if you have a dependent child or secondary student under 20 not receiving a pension, payment, or benefit such as Youth Allowance, and you also provide care for the child for at least 35% of the time. You must also meet an income test.
• Child Care benefit or rebate:  not income tested but subject to eligibility criteria. The government covers 50% of out-of-pocket child care expenses for approved child care, up to a maximum amount per child per year, in addition to any other child care assistance.
• Parental leave pay: financial support for up to 18 weeks so eligible parents can take time off work to care for a newborn or recently adopted child. This is subject to the income and work test, and you must be on leave or not working from the time you become your child's primary carer until the end of your paid parental leave. 

Investing smart

Parenting can have its financial advantages.  Factor these into your budget.

• You can invest in assets in a non-working parent's name. The non-working parent can have a lower marginal tax rate and therefore income from investments may incur lower tax.
• You may be eligible to receive superannuation co-contribution. If one of you is working part-time, and you make an (after-tax) contribution of $1000 into super, the government can give you up to $500, subject to income and other eligibility requirements.  There are also spouse super contributions for non-working parents This tax offset applies to contributions made on behalf of non-working or low-income-earning spouses, whether married or de facto.
• You may be able to claim a tax offset of up to $540 a year on behalf of your non-working or low-income-earning spouse if you meet certain conditions.
  

Protecting your family against the worst

It might be time to review your life insurance and health insurance and ensure you have an appropriate estate plan in place before the baby arrives. A good estate plan can ensure that your assets will go to the right people at the right time and in the right manner, after your death. At the very least check that any life insurance cover you have through your super continues when your employer contributions stop and that you have a valid will (including guardians) in place.

Becoming a parent can be nerve-wracking, with a lot of decisions to make, but it's also a precious time.  Give yourself the space to enjoy it by setting a plan of action broken into manageable steps that you can implement.  Your financial adviser can help you break it down.