85 - How to adjust your financial planning before your baby is born
Question: We are expecting our first child next month. What changes should we make to our financial plans?
Answer: Having a child makes a massive difference to your financial planning. You now need to look at protecting your family’s financial future instead of just your own. I will go through the key issues you should look at.
Protecting income streams
Before the birth of your child, the only life cover you needed to consider was to cover any debt such as a car loan or a bond.
With the arrival of a child, your time horizon changes.
You now need to ensure that your family remains on the same financial trajectory they are currently on, even if you take one income stream out of the household.
You now need to insure the future paycheques that you and your spouse will receive till the time your child finishes studying. Be warned that many children move back home at some stage. About half of my clients have had children living with them until their thirties.
The same holds true for disability cover. If you or your spouse cannot work for an extended period, will your family be able to maintain its lifestyle?
You can get cover that offers you a lump-sum payout to replace your future salaries should you be unable to work permanently because of an illness or disability.
You can also get shorter term, income replacement cover.
Insider tip
Many people survive financially with the help of side gigs. If these activities provide a regular income, you should consider getting these income streams insured. There are companies that provide cover for these less formal income streams.
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Saving for the future
It is always a good idea to start saving for your child’s education as soon as possible. Most financial advisers have software that can calculate the future costs of education and recommend how much you should be investing each month to cover these costs.
A lot of my wealthier retired clients take out tax-free investments for their grandchildren as part of their R100,000 annual donations allowance. They typically invest R36,000 a year for the grandchild for 13 years, at which stage the lifetime tax-free allowance of R500,000 will be used up. Their grandchild will then have an investment which they can access in years to come and not pay any tax on it.
Medical cover
Most medical aids require that you register your baby within 30 days. If your baby needs to be hospitalised and has not been registered with the medical aid, it can cause a lot of unnecessary paperwork and stress.
Wills
You need to update your will and make provision for the setting up of a testamentary trust should you and your spouse pass away.
Making good financial decisions when your baby is born will help your family’s financial wellness. Most financial planners should be able to help you put the right structures in place.