Surprise it’s a… (rather financially plan for kids)
26 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. You’ve decided that you and your partner want to start a family, great, we wish you lots of luck and many long years of happiness with your children. But have you thought about where the money for them is going to come from?
Children are a very long-term commitment and can become extremely expensive, especially when they get older and head off to university. We’re joined now by Jillian Howard, author of The Best Pocket Guide Ever for Family Finances. Jillian, for a young couple, which ought to arrive first, the house or the baby?
Jillian Howard: I would say the house, renting is going to be expensive, it’s nice to get comfortable in your own house first and work out your costs and everything before you decide to go for children. I think it’s important to do your financial planning as a couple and make sure you have enough of a surplus in your budget before you start looking at having children.
CG: Let’s assume then that the house is taken care of, the accommodation is taken care of, in some way or the other, perhaps baby is already on its way, that happens, what are the first steps?
See if you can afford it without relying on credit
JH: Preferably do some research on how much babies and children cost. You’ve got to increase your medical aid, add a baby or a child to the medical aid. Then there’s day care and later there’s schooling. So as well as the upfront cash out lay for cots and prams and car seats, yeah, check your budget very carefully. See how much you can afford and don’t buy items for baby on credit. Stick to what you can afford easily, get the family involved in buying all the stuff as well.
CG: The important word there, ‘credit,’ do most young people really understand the true cost of debt?
JH: I don’t think they do, I have written it in this book about after tax credit. Because you’re buying something that costs say R500 a month on credit, but you have to earn R500 plus whatever your tax is, say 30%, in order to pay for that credit. The true cost is way more than the amount that you think you can handle.
CG: Really, what you’re saying is before you start planning a family, you need to pay down as much debt as possible?
JH: Yes, that’s always a good idea to have an extra surplus, but if you do your research, if you ask friends and family who have had babies and they’re paying school fees and whatever; how much a month do your children cost? Then you need to look at your budget and say, do I have R2 000, R3 000, R4 000, R5 000 extra a month to afford a child. If I don’t, what am I going to do about it.
Cost arise even before baby arrives
CG: In your book you make the point that there are costs even before the baby arrives, including the cost of pregnancy itself.
JH: That’s right, yes, and having the baby. Some medical aids pay for the whole lot. But some don’t. Quite often after you’ve had a baby, even a normal delivery without complications, you’re left with a medical aid bill. A surplus that they haven’t covered.
Then if there are complications, it can get quite large. Quite often you want medical aid to be the best for you and the baby. So you’re on maybe a savings plan when you fall pregnant. Then afterwards you would need to go onto a more comprehensive benefit.
CG: Medical aid, what about life insurance?
JH: You do need to take out an extra life insurance for children. The reason being that you’re bringing a child into the world that can’t go out and get a job and look after itself. If something happens to you, there’s got to be money around for that child to be raised. You really need to, if you haven’t taken life insurance before, then when you have children, that’s the best time to start.
Coping with the loss of one parent’s income
CG: Baby has arrived, what if one of the parents and it’s usually, not always. But usually mum, decides to stay home for a year or two. How do you approach that one?
JH: They need to, again, it all starts with a budget, look at the budget and see if they can afford for one parent to not work. If they can, after doing research on how much children cost, they can decide on it. What they can also do is, one of the parents that stays home can perhaps consult part time. Just to help raise the income there a little bit as well.
Another option I’ve written about is when a parent takes time off and they have a career, they career onto parent. They could take that time to study so that when they do go back to work. They’re earning more anyway, just to help compensate for the years that they’ve taken off.
CG: It’s also worth pointing out, and I say this as a parent, when the baby is brand new, they do spend an awful lot of time asleep.
JH: Yes, they do, but then so does the parent to catch up.
The long term plan for education
CG: Fair point! You’re listening to Old Mutual Live, the Money Coach edition. On demand, visit dogreatthings.co.za. I’m talking to Jillian Howard, author of The Best Pocket Guide Ever for Family Finances. Jillian, now the child has arrived, children hopefully over time, so you have to start thinking not just about cute romper suits, but what’s going to be happening when he/she is a pimply teenager. Then when not just secondary, but tertiary, university type education comes over the horizon, this is real long-term planning.
JH: It is. I think when your budget has got over the shock of paying for a new child, a new baby. Then you seriously need to start looking at saving for a decent education. There’s a couple of options. Traditionally people like to say: I need an education policy and what an education policy is basically; it provides saving as well as life cover in case the payer of the policy or the investor. As such, something happens to them.
If you’ve reviewed your life cover, perhaps you don’t need an education policy that includes life cover and then alternatively you can use any type of investment, from a unit trust, even to property investment. The idea is just to put something aside every month. So that there is a pot of money for the children when they go to varsity, because it is very expensive.
CG: Unit trust, I understand, when my kids were small, I put R100 a month into a unit trust account for each one of them, just kept that up for well over 20 years. There was a little pot at the end, but you mentioned property as an investment for the kids, how does that work?
JH: Children generally go to varsity at about 18, so if you buy a house, it can be paid off by then. Then the rental income that you get can go towards monthly payments of university fees. I’ve had a couple of clients who have done that. it depends on what investment you like. If you’re into property and you enjoy investing in property, then you can make it work for your children’s education.
CG: A very interesting option indeed and there we’re going to leave it. This has been another edition of Old Mutual Live Money Coach, my name is Chris Gibbons, I’ve been talking to Jillian Howard, author of The Best Pocket Guide Ever for Family Finances. Gillian, I know your book is available in all good book stores, can I also get hold of a copy online?
JH: Yes, you can, takealot.com and some other outlets, you can do, yes.
CG: Excellent, Jillian, thanks for having been with us once again. 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. Just send them direct to me at email@example.com, I would be delighted to hear from you. Until the next time, thank you for listening. Old Mutual Live, on mobile, on digital, on demand.