How saving for a baby can take financial pressure off you
19 October 2016
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On mobile, on digital, on demand, this is Old Mutual Live Money Coach. Hello and welcome, my name is Chris Gibbons. Once again we’re focusing on the question of savings. Should you save, why, and if so, how much? We’re joined now by an expert in the field, the Chief Executive Officer of the South African Savings Institute, Gerald Mwandiambira. He was also a professional Chartered Financial Planner and author of the book, My Money, which deals with this and a host of other topics.
Gerald, welcome to Old Mutual Live Money Coach, thank you for your time. Your book, My Money, follows a broad outline which is not dissimilar from life itself. But before we start at the beginning, babies and childhood. You have a broad opening chapter which you describe as ‘the most important’ and it’s titled What Does Money Mean to You. Why is that important?
Gerald Mwandiambira: I think it’s important Chris in that money is something which is very emotional for most of us. There is a psychological element in terms of how we all relate to money. Money is simply not about the nuts and bolts of understanding how to spend, how to save etc. It’s also about the experience in terms of your personal and financial encounters with money in your life.
The first chapter is really saying, who are you in terms of money, what is your money personality. How were you moulded in terms of how you relate with money? You often find, especially with the black population, that they have very negative views towards money. Simply because they grew up from positions of lack.
How experiences influence how you deal with money
When they do get an opportunity to experience money, they go to the extreme in terms of trying to almost forget or erase the negative memories, often getting themselves into debt. That first chapter is saying, take an assessment, take stock of yourself, who are you towards money because your attitudes towards money are not formed at adulthood, but were formed through your childhood.
CG: Can you give me an example of the kind of different personalities you talk about?
GM: There’s different types of personalities. One type of money personality would be one who can broadly be described as someone who is extremely stingy. Someone who is almost irrationally conservative in terms of money. These are investors which might give a very conservative risk profile, who are so fearful of losing, that they almost don’t want to make any decisions around money.
That’s one personality you often to encounter. Once you dig deeper, you often find that there’s a traumatic event in life where that individual has lost a certain amount of money, or money affected them negatively. Hence they have that type of attitude towards money.
CG: Okay, so now we’re off and running and starting at life’s beginning. It’s time to have a baby, how should the happy parents prepare?
How to start planning for a family
GM: Essentially when you’re having a baby, one must remember that a child is the greatest expense which no one plans for. A child can easily cost you R50 000 to R100 000 in their first year. This includes diapers, childcare, medical aid etc and it’s the one thing no one really plans for.
It’s like everybody is looking forward to having children, but no one is actually planning in terms of getting there. This chapter is really talking about, we need to be in a situation where we start planning ahead for having children and this involves saving.
CG: Do we need to save in a particular way and are there any benefits that might be available along the way, things like maternity leave, UIF income?
GM: Exactly, I think it’s about finding out about those things. Everyone in this country is entitled to money from the UIF fund when they are on maternity leave. Many people simply don’t claim, yet is a right and it’s available for all pregnant mothers in South Africa.
Another way of planning is simply to sit down with your spouse and really start planning ahead in terms of even the schooling for the child and this involves things like education policies. Even looking as far ahead as university, assuming that fees don’t fall.
CG: The medical aid side of things, the life insurance side of things, you need to consider those as well I guess?
GM: Medical aid is very important because children get ill, especially babies. You need to make sure that you’re on a medical aid plan that covers most of the hospitalisation needs, as well as the outpatient needs of the child in terms of medical bills like vitamins, colds, flu, etc.
First thing, look at your medical aid, how does it apply to my baby. Because it doesn’t apply the same to you. On life insurance, suddenly you now have to review your life policy because your child is a financial dependent until they become an adult.
Therefore, you need to make provision that in the sudden event of your death or absence, that child is provided for through some sort of investment. A life policy is really an investment and a savings product which you can actually take up, which ensures that if something happens to you, your child will not suffer in terms of financial prejudice in your sudden death.
Do you need a specific baby budget?
CG: Do you need to sit down and do a proper separate budget Gerald, for the baby expenses?
GM: Definitely, I think you do. I think babies are also one of those emotive topics where people try and keep up with the Jones’s. They want the latest three-wheeler stroller, they want the latest thing for their child and managing expectations of young parents is difficult.
But it’s important that parents also realise that they need to live within their means with their bundle of joy. Yes, it is a natural temptation to want to do everything we never got as babies for our children. But it must not be to the detriment of your finances and to your future.
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. Gerald, finally, you also go on in this part of the book and this is unusual I think in a financial planning type of book. To counsel the parents about how they should approach the subject of money with their children as they grow up. What do you recommend and why is that important?
Why it’s NB to financially educate your children
GM: It’s essential because remember, we said we all have a money personality and those money personalities were formed largely by our parents in terms of how they related to money. It is important that you start to allow and form your child into a certain money personality. So that they do not fear nor are they commanded or controlled by money. You need to teach your child the basics and the absolute basics involved three piggy banks.
The first piggy bank is one where you teach your child whenever you put money in here, mom or dad is going to put the same amount you put in here. That piggy bank is very important because you’re just laying the foundation to investment that delayed consumption can have rewards. If I don’t use this money, mom or dad will fill it up. This then becomes the financial system when the child grows up that the understand, if I put money aside, I can grow it.
The second piggy bank is really quite clear. You tell the child, whatever you want, start saving for and putting the money in that particular piggy bank. In that piggy bank you’re now teaching the child towards goal oriented saving. This is also goal oriented saving which is the premise of budgeting so that the child realises that for anything that they desire in the future, they can plan ahead by putting aside now.
The third piggy bank, which is also just as important is one which you say to the child, for the less fortunate, put money in here and give it away. Because we don’t teach our children how to give and we have a society where many people cannot appreciate the blessings or the financial blessings that they have. Simply because they don’t know how to let go.
With these three piggy banks you can already start forming a personality. Once that piggy bank is full, you take the child to a bank and they put the money in there and say look, this is where they keep your money, this little card allows you to take your money when you need it. That’s your first introduction to the financial system for a child.
CG: Very sage advice and there we’ll leave it for today. This has been another edition of Old Mutual Live Money Coach, my name is Chris Gibbons. With me on the line from Johannesburg has been the CEO of the National Savings Institute, Gerald Mwandiambira. Gerald, if anyone wants more information, or a copy of your book, where would they go?
GM: The best place to go is askgerald.co.za.
CG: Remember, please feel free to get in touch any time if you have any questions for me or topics you’d like covered on Old Mutual Live Money Coach. Please feel free to send them direct to me at firstname.lastname@example.org, I’d be delighted to hear from you. Until the next time, thank you for listening, Old Mutual Live, on mobile, on digital, on demand.