Having a baby is one of life’s greatest joys, but it requires a fair amount of financial planning for the future. In fact, money will be the focus of many of the decisions you make moving forward!
Being financially prepared provides your children with more opportunities and removes (some of the) money-related stress from your parenthood journey. So, if you’re preparing for your first child, take these five financial planning tips and set yourself on the right path.
Create a budget
If you’ve never budgeted before, now is the next best time to start. A budget breaks down all your expenses to show you exactly what’s left over once all outgoings are paid. This includes mortgage, rent, groceries, electricity, phones, memberships, insurance, savings and petrol.
As a new parent, you’ll also need to start including any child-rearing extras, such as formula, nappies and childcare. There may be times, particularly in the earlier years, where your income is tight or falling short. If this is the case, see if there are areas where you can cut back and set spending limits to ensure you stay within your means.
Save as much as you can
Saving is a long-term exercise that sees small and regular increments snowball into a significant monetary reward. It’s a tried and true method of ensuring you have plenty of money stowed away for large purchases, emergencies, or investments.
Everyone’s financial situation is different, which means everyone’s saving capabilities are different. But as long as you’re sending some of your income to savings, you’re on the right track.
The rule of thumb when it comes to savings is 20% of your income. Sometimes you might save more. Sometimes you might save less. This is ok as long as you’re saving!
When baby arrives, the odds of needing a rainy-day fund increase substantially. Whether you’re looking to purchase your first family home or you need a larger car, your savings will come in handy for a whole range of reasons.
Take care of debt
Debt is a real financial killjoy. Carrying debt when you’re young and child-free may not seem like a big deal, but making debt repayments when baby comes along will be a major strain on already-limited finances.
Not everyone has the means to clear debt overnight, but it’s important to work towards becoming debt-free any way you can.
Making minimum repayments is not a solution for clearing debt. Most of the time, this covers only a little more than the interest accrued. It may mean sacrificing a few luxuries for a while, but this will be well worth the reward.
If you have several debts owing, consider consolidating these into one low-interest loan.
Trying to tackle multiple debts is not only confusing, but it’s also costly. For example, if you’ve taken out a loan, owe money on car repayments, and have credit card balances to clear, you’ll be making interest payments on all three debts each month.
Debt consolidation will bring your interest payments down to just one!
Get the right insurance
Talking insurance can be daunting, especially when you have to consider every possible scenario that may require an insurance pay-out. As hard as these conversations may be, they’re crucial to understanding the value of insurance for a growing family.
When choosing the right insurance, life, health, and disability insurance are good places to start.
Life
Life insurance ensures the financial security of your partner and children should anything happen to you.
The purpose of a life insurance pay-out is to clear mortgage debt and leave your partner with enough income to help with other costs of raising a family, such as childcare and bill payments. The total amount of your life insurance policy will depend on your full financial circumstances.
So, even if money is tight, you will still be able to take out life insurance.
Health
The cost of your health is unfortunately very high. If you or your family need medical attention for any reason, you could be hit with an incomprehensible bill. In many cases, these bills are impossible to clear.
Having health insurance ensures you or your family member will get the help you need while avoiding hefty medical debt. If you already have health insurance, be sure to add your child to your existing policy.
Disability insurance
All your financial planning will go out the window if you become unable to work. Disability insurance provides you with income if you are temporarily unable to work due to illness or injury. While health insurance covers your medical expenses, disability insurance keeps you on top of day-to-day expenses, just as your regular income would.
Open a separate savings account for your child
As your child gets older, their expenses often increase.
School fees, music lessons, sports uniforms, their first car – costs pop up as kids grow up.
Opening up a savings account as early as possible lets you build funds towards unexpected costs later in your child’s life. Having the money available can open the doors to a whole range of opportunities that may not otherwise be available to them.
As your financial situation improves, you’ll be able to put more away and work towards larger expenses such as college tuition or overseas travel. Your child’s savings account is an investment towards their future, so ensure you’re earning a high interest rate on the funds.
As this is a long-term savings plan, consider opening a Certificate of Deposit (CD) which earns a higher rate of interest than an average savings account.
Conclusion
Being financially prepared makes the journey to parenthood even more joyful. When you welcome your new baby, your priorities change, including your monetary priorities. Plan well, and you’ll enjoy the wonders of raising a child without the weight of financial strain on your shoulders.
