How to be financially ready to start a family - Episode 5

Starting a family is a huge step in a great many of our lives.  Bringing a new little human into the world.   So much hope.  Scary too!  Completely life changing. Financial Autonomy is about you taking control of your finances, and not being controlled by your finances.  The focus of this audio blog is to think through the financial implications of taking this big leap, and what you can do to prepare for this major transition in your life. Also, if you’re reading or listening to this during the pregnancy phase, and are anything like my household was prior to the birth of our first child, you’ve probably read enough books like What to Expect When Your Expecting, and Up the Duff.  I promise there will be no references to what pregnancy will do to your body, or any of the seemingly infinite ways we can be a terrible parent and ruin our child’s life. My name’s Paul Benson, and thanks for listening to Financial Autonomy, the audio blog.  Let’s dive into today’s episode, how to be financial ready to start a family. How to be financially ready to start a family could easily be rephrased as “How to survive on less income and with more expenses”. The stereotypical scenario is that dad continues to work full time after junior’s arrival, whilst mum stays at home and try’s to maintain her sanity.  Of course there are all sorts of permutations and combinations of how different families make things work, but almost inevitably, there will be less money coming into the household than there used to be.  On top of this, you now have an extra person in the household, who maybe doesn’t eat that much (yet!), but goes through nappies like it’s an Olympic event, and for whom every little cough is diagnosed by the new parents as likely bird-flu, requiring your next month’s wages to be donated to the local chemist. So financially, starting a family is a very big deal.  But with some planning, it needn’t be stressful.  Sleep deprivation will be stressful enough. So where to start?  You need to understand your cash flow.  How much money comes into the household, how much goes out, and where does it go? The cash coming in is fairly straight forward assuming you are an employee.  Possibly less so if you are self-employed, though hopefully you have a good sense of the normal cycles of your business and can forecast your income with a reasonable level of certainty.  If one of you runs a business and the other is currently an employee, there may be scope to split income after the baby arrives.  It’s a bit of a curiosity with the tax system, but two people each earnings $40,000 will end up with more money in their pocket after tax, than a couple where one person earns $90,000 and the other nothing.  This may also point you to a solution of each parent working reduced hours, instead of the more typical one at home and the other working full time.  Something to consider at the very least. So in terms of being financially ready to start a family, you’ve got a clear picture of what the income piece will look like once bubs arrives.  What about the expenses? Hopefully you’ve got a budget.  If not, visit the resources page on the financialautonomy.com.au web site and download our template.  Look up your bank statements via your internet banking, fill in the figures, and away you go. It is important to understand where your money is currently going and then think through how that will change once your family moves from 2 to 3 people (or maybe more if you’re really efficient!).  Maybe public transport fares will drop.  You may spend less on eating out.  But of course you will now have the cost of nappies and all the other bits and pieces a new born demands. Once you have your head around the numbers, it may be valuable to adjust to living on one wage before the baby arrives, assuming your plan is the most typical scenario of one parent at home and the other in the workforce.  If you can demonstrate that your household can manage on that one income, you can have a high confidence that you are indeed financially ready to start a family. Another approach that I have seen is where the couple assumes and focuses on mum staying at home for 1 year.  The solution they are trying to find therefore is not necessarily the long term plan, but rather just a one year solution.  Sometimes they approach it that way because planning further ahead is just too daunting.  Alternatively that approach might be adopted to recognise that there is a lot of uncertainty in this phase of a couple’s life.  Perhaps the member of the couple staying at home might hate it and want to return to the paid workforce full time as soon as possible, or at the other extreme, couldn’t imagine leaving bubs with a carer and wants to remain a full time stay at home parent beyond maternity leave.  Options around returning to work part time are not always known 12+ months out too, so sometimes, just focusing on the one year makes a lot of sense. So if you are focusing in on a one year solution to being financially ready to start a family, items like any maternity leave and perhaps annual leave entitlements might provide a significant portion of the solution.  I know of some couples who have arranged to take leave entitlements at half pay to extend the duration that they continue to have income coming into the household. The government’s Parental Leave scheme might also provide some very useful assistance.  This is paid at $672.60 per week for 18 weeks.  Eligibility is fairly generous.  Check out the link to see all the criteria. And whilst the Baby Bonus is now gone, you may still be eligible for its replacement, the Newborn Payment. In developing your plan to be financially ready to start a family, on-going government payments may well be an important element. The primary form of government assistance for young families is the Family Tax Benefit and the Department of Social Services web site explains the support available like this: Family Tax Benefit (FTB) is a payment that helps eligible families with the cost of raising children. It is made up of two parts:

FTB Part A – is paid per-child and the amount paid is based on the family’s circumstances. FTB Part B – is paid per-family and gives extra help to single parents and families with one main income.

Family Tax Benefit – Part A. If household income is less than $51,904, you will receive the maximum entitlement.  Beyond that, your entitlement depends on the number of children that you have and their ages. As mentioned in the summary above, this is a payment paid per-child. For those about to have their first child, you would cease to be eligible for Family Tax Benefit - Part A once household income reaches approximately $100,000.  The link provided shows a table to explain how this works. If you qualify for the maximum payment, for a new born you would receive $182.84 per fortnight currently (April 2017).  This is certainly a handy amount and well worth incorporating into your cash flow plans. There is also a Family Tax Benefit – Part B. This is potentially another $155.54 per fortnight.  As per the summary mentioned earlier, Part B is a per-family payment and focuses on households with one income.  It is therefore often relevant for couples starting a family.   Where one member of the couple is at home full time, you will receive the maximum Family Tax Benefit - Part B, if you’re working partner’s income is less than $100,000. There are also supplement payments added to both Part A & B at the end of the year in some cases, which can act as a handy lump sum. The various means of government support are certainly not easy to get your head around, but for those eligible they can be very helpful in making the household budget work, so take some time to look at the various links and aim to arrive at an estimate as to what you might receive.  To summarise, there are 3 likely sources of recurring payments:

Parental leave scheme – 18 weeks Family Tax Benefit Part A – a per child benefit Family Tax Benefit Part B – target at single income households

  Child care is another likely new expense that may need to come into the family budget.  Whether it’s to enable you to return to some paid employment, or just to get a sanity break and a few things done in peace, childcare is often a meaningful expense in a family’s household budget. The cost of child care is subsidised by the government via the Child Care Rebate.  This will cover 50% of the cost of childcare up to certain limits.  A day of childcare at a child care centre is likely to cost around $100 per day, or $50 after the child care rebate.  This varies quite a bit depending on where you live though, and there are solutions like family day care that in some cases are cheaper.   Whilst not something that you need to immediately factor into your household budget once bubs arrives, a final tip that has been really helpful for my household.  When our first child arrived we put a few lumps of money into a managed fund with the intention that this would help towards his secondary education fees.  We weren’t real sure where we would send him, but we felt is was likely he’d go to some sort of private or catholic type school.  At the time I worked in a role where I got occasional lump sum bonuses, and these were the amounts we socked away. My wife and I went on to have a second child, and as the boys got older, and education plans firmed up, we weighed up the best use for those savings that we’d put aside.  My youngest starts secondary school next year and so we’ve decided to use the education savings to assist us during the “overlap” years – the 3 years where we have both boys in secondary school.  The amount put away all those years ago has grown to be enough to cover one boys fees for these 3 overlap years, so that effectively we will just be paying roughly the same amount of school fees that we have been up until now, from our normal cash flow.  I have to tell you that this solution is enormously helpful for our household.  So give some thought what you might be able to do around putting some money into a long term growth investment to help towards education costs down the track.  Putting some money away early will enable the magic of compounding to do much of the heavy lifting for you.   Preparing yourself to be financially ready to start a family is a very important and potentially challenging task.  If you need help, we’re here.  Go to the Work with Me page on the financialautonomy.com.au web site and book an appointment.  Helping people do this sort of planning is what we do every day.   Well I hope today’s audio blog has brought you a bit closer to being financially ready to start a family.  

Important Information:

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.