Four budget changes to consider when starting a family
Life changes dramatically when you have a child, and so too do your finances. Lifetime’s John Whyte shows you how to keep your budget under control when two becomes three.
OPINION: Starting a family can be one of the most rewarding milestones a couple can experience. And one of the most stressful.
Planning for your first child might seem like a daunting and overwhelming task, but managing your finances need not be when you have a good idea of what to expect and how to budget around it.
Here are four financial considerations every couple should talk about before baby arrives.
Changes to your budget
It's important to know the family’s financial position if one partner is planning on staying home to raise your child – even if it’s only for a few months before you are both back at work.
In addition to legal requirements, understand your company’s maternity leave policy and work out the shortfall of income during that period. You’ll need to adjust your budget to manage on one income: this step is a vital as you don’t want to return to work with debt incurred during maternity leave.
Depending on who earns the higher salary, it may be worth considering who stays at home with your child after paid maternity leave periods end for both partners. Alternatively, if both parents plan to go back to work, you’ll need to factor in childcare costs.
Talk to your financial adviser about helping you adjust your budget. This expertise can help you restructure your home loan, pay down debt and assist in adjusting to living on a lower income.
In an ideal world, the goal is to be able to survive on one income before having children and save the second income in full – but this isn’t always possible. However, there are creative ways to reduce your expenses. For example, if you need a bigger home for baby but you’re still on the same budget consider moving from the city to an outer area with access to good facilities, where the cost of housing or rental is likely to be less.
In essence, your priorities will shift when you start a family and so too will your finances. Be flexible and plan with your new financial situation in mind. With a new budget in place, you’ll feel more in control of where your money's going.
Developing a layer of ‘financial padding’
As it often is with kids, there may be additional unforeseen costs you’ll need to meet. Once you start planning for a baby, it’s wise to put aside some money as part of an emergency fund. This can cover any specialist treatment, items required or other unbudgeted costs. Building up a reserve now can make managing these expenses easier once the baby comes.
Common financial mistakes couples make when starting a family:
- Living beyond your budget: don’t underestimate what a new baby costs. Kiwi parents pay $304 extra per week with a baby between 0-12 months, according to research undertaken by Massey University, Plunket and BNZ.
- Not discussing your finances or planning for the future: most couples argue over money, and this can be more stressful when it comes to having children.
- Forgoing health insurance: there are minimal costs to include children to your healthcare plan, and the benefits may mean giving your child access to the best doctors and specialists in a time of need.
Creating or updating your will
Regardless of your age, a will is imperative to safeguard your children. One of the first things to do after having a child is to put a will in place or update your existing arrangements. Look at appointing guardians in the case of both your deaths and make sure the person you appoint understands and accepts the responsibility. Guardianship gives children security that they won’t be pulled from pillar to post.
Make sure your will is signed by both parties to it and inform your financial adviser where it is lodged so that they can speed up the process if the worst happens.
You should also include an “enduring power of attorney” clause for both of you. This will ensure that should you be incapacitated, your partner or named person can make decisions around treatment and finances, and in doing so provide stability to your children.
Checking your risk protection for any gaps
Once you have dependants, your risk coverage needs are likely to change. Options to chat to your financial adviser about include life insurance, trauma cover, and survivor’s income cover, as they are designed to provide a source of income should you or your spouse be incapacitated or die. When you consider the financial ramifications of the remaining family having to juggle full-time work and all existing costs, these types of covers make financial sense and can give you welcome peace of mind.
Adjusting your risk coverage is a vital step to ensure your family does not have financial stress during such a traumatic event. Policy pay-outs will give family members time to adjust to new circumstances and means there’s no need to make any rash decisions.
It’s as important to not forget about cover for any stay-at-home parent as insurance can help pay for the cost of additional childcare, professional cleaners, or any cost likely to be incurred by the loss of a parent.
Certain insurance policies – such as trauma cover – pay out at no additional cost should your child be diagnosed with one of the illnesses stipulated by its terms. If you have existing policies, speak to your financial adviser about updating them so that you have adequate cover and that it includes your new dependants.
John Whyte is an experienced financial adviser who has 24 years’ experience in the New Zealand insurance industry. Based in Christchurch, John is passionate about helping young families make better financial decisions.