Financial Planning considerations when starting a family
This is particularly relevant to me as my wife is now 6 months pregnant and our lives are about to change forever! I have spoken to clients countless times about how having children drastically impacts our financial situation and it is imperative that our financial plan reflects this change.
Our income and expenses are going to change substantially. My wife is very successful in her career and is planning on having 12 months maternity leave. We will definitely miss her income. At the same time our lifestyle will change substantially, which will greatly affect our expenses. Being the stereotypical DINKs (Double Income No Kids), we eat out often, spend too much on our hobbies (golf and running for me, shopping and fitness for my wife), and are at times less careful than we should be with our discretionary spending.
Our expected daughter is going to mean we do all of that stuff less, but will have a new bunch of expenses associated with our new baby. Our old budget is out the window; both our income and expenses will have changed so much, the existing budget will bear no resemblance to our new life and new spending priorities.
We will have much lower capacity to save and we will have to change our savings plan. Some couples starting a family may go into a cash flow deficit, with expenses being more than income. There are some strategies to address this, hopefully we will have prepared and will be using existing savings to make up the shortfall. Other options, such as converting mortgage payments to interest only in the short-term may be the solution.
Having a family will mean, for the first time in our life, we are financially dependent on each other and will have a child who is completely financially reliant on us as well. This means that our life insurance strategy is no longer even nearly appropriate any more. We have had to significantly increase our life insurance to make sure that, if something happens to one of us, we will be financially OK.
Having my wife not working for an extended period of time also creates some planning opportunities. This upcoming financial year she will be in a lower tax bracket, enabling us to distribute some income from the business to her, reducing our taxation. She may also qualify for some benefits that she normally wouldn’t qualify for due to her income. The Government Super Co-contribution for instance.
As soon as anyone finds out I’m having a baby, they tell me how much my life is about to change, which is exciting, but this change also means a change to my financial plan.