Having a child is one of life's most rewarding and transformative experiences. But it can also be stressful. ("Nerve-wracking" is how former NRL star Luke Ricketson describes being a new father.) Some good financial advice can definitely help relieve the stress.
Here are five key considerations compiled by Westpac Senior Financial Planner, Diana Saad, for taking some of the pressure off - so you can concentrate on your new bundle of joy.
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.”
The table below can help you estimate the new costs of raising your child.
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. You might also consider refinancing to improve cashflow, i.e., temporarily switching to an interest-only loan while you adjust to your life changes. Again, you might seek the advice of a financial expert to help tally the costs and benefits of each option.
2. 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.
3. 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 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.
4. 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 an 18% tax offset on super contributions of up to $3,000 you make on behalf of your non-working or low-income-earning spouse.
5. 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.
Don't have an adviser yet? Adviser View is a good place start.
This information is current as at 18/05/2015.
This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. Information current as at 6th May 2015.
Westpac Financial Planners are representatives of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian Credit Licence 233714. The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. Any tax position described is general and incidental to the financial advice. It has not been prepared by a registered tax agent. Please consult a registered tax agent for specific tax advice about your individual situation.
These projections are predictive. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.
Superannuation is a long-term investment. The government has placed restrictions on when you can access your preserved benefits. The Government has set caps on the amount of money you can add to superannuation each year on a concessionally taxed basis. In addition, the government has set a non-concessional contributions cap. For more detail, speak with a financial adviser or visit the ATO website.