Significant changes in your life can affect your finances too. Having children is no exception, so follow this sound money advice tailored to young families
From the outset, your daily expenses increase with each little person added to your family. All of a sudden, you need to pay for nappies, childcare, medical expenses and a slew of other baby-related costs. At the same time, one parent may be taking a break from work, or working fewer hours, to look after the kids.
Before talking about insurance and investment, let’s focus on budgeting and estate planning. It’s a good idea to work out a budget as best you can, and then track your spending so you can fine-tune your budget to reflect your new lifestyle as a family. Adjust your budget until you come up with one that works for your family.
Next, something no one likes to talk about – your will. What will happen to your assets if you die? Who are your children’s guardians? It’s also important to go through all your investments and insurance policies to check that your preferred beneficiaries are listed. If heirs and beneficiaries are not clear, the estate can be tied up and the funds not readily accessible for a period of time.
Adding a new member to your family comes with a long list of demands, and it’s not unusual to feel quite torn by the many responsibilities
A serious illness or injury that requires a lengthy stay in hospital, or a long period of rehabilitation and recovery, can be financially devastating. Your medical aid is unlikely to meet all of your medical costs, which means that you’ll have to pay the balance out-of-pocket. You may also find yourself not working, and while you can claim from UIF if you are injured or ill and out of work for an extended period of time, you will still experience a drop in income.
In addition to your household insurance, you will want to consider some of the other types of insurance that can provide a buffer between you and financial disaster:
- Income protection replaces your income if you are unable to work due to injury or illness. You get a certain portion of your salary (usually 75% of your net salary) after a certain period of being unable to work (one to three months, usually). Your case might be reviewed annually, depending on your likelihood of recovery.
- Dread-disease cover pays out a tax-free lump sum that can be used to assist with medical expenses, replace a certain amount of lost income or pay off a bond.
- Disability cover provides a tax-free lump sum payment to enable you and your family to pay some, or all, of your debts if you become permanently disabled, and to replace lost income.
- Life insurance will provide for your family in the event of your death. Of course, the more you pay every month the more coverage you get.
When you have a child, it’s a good idea to consider a medical aid or hospital plan, or to re-evaluate your current one. There are many options, from the high-end schemes that cover just about everything, to pared-down schemes that are cheaper, but don’t cover as much. Investigate gap cover too – it is a relatively inexpensive add-on that makes up the shortfall between what the medical aid will pay, and what you will be charged for a hospital stay.
The earlier you start saving for your child’s education, the better. The tertiary education landscape in South Africa is quite unpredictable, so having money set aside for university or college will give you more options and greater peace of mind.
If you start saving from the time your child is born, you can build up a good base before you have to pay for school fees. Remember, the cost of education and add-ons generally increases with every year of schooling. Ricky says, “Education is something that we can plan for – we know when it’s going to happen and the likely cost. The fact is that it’s expensive. Putting away R500 a month, which is R6 000 a year, is not going to give you much in terms of education. R1 000 a month over five years will give you just more than R60 000, which is significant, but it won’t pay private school fees.”
Bear in mind that inflation in education is higher than the consumer price index (CPI). A bank account generally gives you returns well below inflation. Even a money market account probably won’t give you good enough returns to keep up with inflation.
There are also a number of savings and investment vehicles specifically designed to help you save for your child’s education. Ricky warns that commission and fees can eat into the growth quite substantially. Instead of a special education product, you might be better off in a flexible equity-based investment vehicle like a unit trust.
The earlier you start saving for your child’s education, the better
It’s tempting to focus on the needs of your children and forget your personal goals and long-term plans. It’s important, though, to stay on top of your retirement provisions. You don’t want to pour all your resources into your kids and then leave them in a position where they have to support you. Ricky says that most people are seriously under-prepared for their retirement. Most people put away too little with fees, commissions and inflation eroding their capital.
Start an emergency fund
Financial advisors recommend that you have at least three months’ salary in an emergency fund that you can access when needed. Life is unpredictable, especially with kids, and this will cover unforeseen expenses or loss of income.
This money should be in an instant-access savings account so that you can get to it when you need it. Discipline is essential, both in terms of building up the fund, and resisting the urge to use it. It is for emergencies only, not to dip into when you’re a bit short on cash.
Where do I start?
Adding a new member to your family comes with a long list of demands, and it’s not unusual to feel quite torn by the many responsibilities. Life cover or dread disease? Do you save for your retirement, or child’s varsity fund? Is it better to put money into your bond, or to invest in more life insurance?
You will have to prioritise, based on your income and your own family’s needs. Some of the elements we’ve covered here may have to go on the back-burner for a while. It is a good idea to consult an independent financial advisor.
Ricky’s advice is to prioritise life cover. “If you have a new child, you have to supply an income for 20 years. Next would be some kind of income protection or dread-disease cover. Again, if you can’t earn a living, you have a problem. People don’t like to think about becoming sick or dying, but I’ve seen young families left without a breadwinner, or lose their house when someone has a serious medical condition. It’s not a risk you want to take.”
He suggests the next priority would be medical aid, followed by other savings and investments, depending on your circumstances.