Parenthood changes everything. From your social life, to your ability to go to the bathroom in peace. It’s no longer just the two of you, you need to consider your children in every decision that you make. Parenthood brings extra financial responsibility, extra costs and quite often less income coming in the door as one partner stays home or often changes to part time work. It’s a big change from your previous double income lifestyle, or as my husband and I call it our BC (Before Children) days.
So, what do you need to know now you are a parent?
- You need to protect your family through insurance. As parent we all want to protect our children from adverse events. One way we can all do this is by making sure we have the right insurance. The financial impact that a sudden death, sickness, trauma or disability can have on your family is huge. You are your family’s greatest asset. Protecting you financially from these adverse events is protecting them. Making sure you have the right types and levels of insurance in the right structure (inside or outside of superannuation) for your circumstances is complex but critical to protect your family. I can help you ensure your family is protected should anything happen to you.
- You need to have a Will. No one wants to think about leaving their children but now you have kids having a Will is essential. Having a valid Will ensures that your children are looked after should anything happen to you, your partner or both of you. It ensures that your assets are distributed in accordance with your wishes, and details who will have guardianship of your children. You may wish to consider a Testamentary Trust, which is a trust that comes into effect on your death, and can be an effective way of providing for your children. A testamentary trust can ensure your children are provided for even if your spouse remarries or has other children. If you already have a Will it will need to be updated when you have children or if your circumstances change such as additional children or divorce. A legal professional is the best person to see to ensure you have a valid Will that meets all the needs of you and your family.
- You need have an emergency fund. You should aim to have six months of after-tax income saved, in a separate account to ensure that you have the confidence to deal with any bumps in the road that life might bring. Another baby, losing your job, life can throw you may curve balls that change things quickly. An emergency fund helps to relieve financial stress when your life does not go according to plan.
- You need to be aware of the huge tax rates that can be charged on savings in your child’s name. Most parents do not know that there are tough penalty taxes for minors. The penalty tax is applied to “unearned income”, that is money the child has not worked for and includes income such as interest, share dividends and distributions from trusts. If you invest under your child’s name, the first $417 of unearned income is tax-free but after that tax is charged at 66%! Any unearned income after $1,308 is taxed at 45%! There are other options to save and invest for your child that are more tax efficient. I can help you explore these options and see if they are right for your circumstances.
- Education Savings Plans aren’t always the best option to save for your child’s education. Education funds are funds that get special tax treatment to help you save for your child’s education. Yes, there are some tax benefits around this type of investment but there are also plenty of rules, so be wary and make sure you read all the fine print. For example, what happens to your investment should your child choose not to go to university? Or if your circumstances change? Furthermore, quite often fees on this type of investment are high, so make sure you compare it to all your other options and be very clear on all the fine print so you don’t get caught out. There are many other options to save for your child’s education. I can help you explore whether they are appropriate for you and your family.
Parenthood does change everything. All parents have their ups and downs on their journey but we all want to make sure our families are financially secure and protected. If you would like help with any of the issues outlined in this post I can help you. Please click here to organise a complimentary coffee and chat with me about your family’s circumstances and we can start securing your family’s financial future.
I hope you found this post helpful, let me know in the comments.
Disclaimer: This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. It does not represent and is not intended to be personal advice. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. We strongly suggest that you seek professional financial advice before acting.