How to be financially ready to start a family
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, not being controlled by them. So what you can do to prepare for this major transition in your life?
Also, if you’re reading 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 You're 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.
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 tries 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.
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 earning $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, a quick Google search will through up plenty of options. My advice is to keep it simple and don’t get bogged down in the detail. Just have broad categories like “Bills” and “Living costs”. 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 newborn 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 level of 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.
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 it was likely he’d go to some sort of non-government 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 boy's 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 to 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.
I publish a weekly newsletter — Gaining CHOICE. It’s brain food for those interested in attaining financial freedom and extracting the most out of life now and in the future.
Paul Benson is a Financial Planner based in Melbourne Australia. He also produces the podcast Financial Autonomy.
