Parenthood is one of life’s greatest gifts, and with it comes great responsibility! Beyond the immediate duties of keeping your child fed, clean and physically safe, parents need to take the necessary steps to ensure they can financially support their children from birth through to adulthood.
Financial security begins with sound financial planning. A 2020 report from the U.S. Department of Agriculture estimates it costs an average of US$284,570 to raise a child from birth until independence – and that does not account for money spent on education. While this figure can vary depending on specific needs, living arrangements and lifestyle – the truth remains that raising a child is a huge financial commitment. Planning for the future before the future arrives affords parents some peace of mind.
Determine Overall Financial Health
Parents-to-be ought to get into the habit of taking a bigger picture look at their financials once a year. Performing a financial ‘wellness check’ can help you stay on top of spending and increase your savings rate. Assess what steps can be taken to make the next year more productive and successful. Evaluate your housing situation, calculate your net worth, analyse your investment strategy, track your average monthly spending, and consider how these figures align with your financial goals.
Enlisting the help of a financial advisor from a specialist firm, or from one of Cayman’s banks, such as Butterfield, can give you a better understanding of your present financial position and help synthesise this info into a comprehensive and realistic plan of action. See ‘Make a Plan’ below for more details.
Your priorities shift massively once you become a parent. Everyday expenses add up a lot quicker, while future investments, such as university and retirement, loom overhead. Taking the time to identify your goals offers parents some much-needed financial direction.
Consider what you want to achieve for your family in the short-term and long-term and ask yourself some grounding questions: Are these goals feasible without having to spread yourself too thin? If not, are there spending changes that can be made in other areas to accommodate said goals? How do these goals presently line up against any fixed expenses? Have you allowed for your needs to take precedence over wants? All things considered, you can then prioritise your goals.
While goals naturally evolve over time, keeping them well-defined is key for forging the future you desire.
Make a Plan
Armed with personal data and a list of aspirations – you can now formulate a workable financial plan for your family. This can be as simple or as complex as you wish, however parents with a hundred and one other things to think about will likely respond better to a simplified approach. The 50/30/20 budget rule is popularly employed and for good reason: instead of dozens of line items, you can divide your money into three manageable buckets.
50% – Costs that Don’t Change
50% of your budget should go towards your fixed monthly costs. These include bills and any instances of debt, such as car loans, mortgage, insurance, and pension payments. In short, these are payments which you can anticipate every month.
30% – Discretionary Money
Your discretionary money can be spent on your ‘wants’ (within reason). Think: life experiences, supporting charities, cinema tickets, family meals out, etc. Depending on your fixed costs and savings goals, the percentage of money allocated to discretionary expenses can be lowered, however it is important to give yourself some freedom, if only to refresh good habits.
20% – Savings
This bucket focusses on the future and reflects your personal saving goals. However, building an emergency fund to keep your family afloat during periods of financial hardship should be a priority. Think: out-of-pocket health emergencies, major home and car maintenance, sudden unemployment or an unprecedented crisis such as the Covid-19 pandemic! The size of your emergency fund depends on several factors, but ideally you will have the equivalent of 3-6 months’ worth of income set aside. Once an emergency fund is squared away, you can then save towards other goals, such as sending your child or children to university.
As your savings start to build you will be able to use these to perhaps make a deposit on a house for you or your children, or even start to contribute more to your pension to enable you to be financially secure in the future. Many banks and financial planners will be able to give you advice and guidance on how your savings can be put to work to generate additional income or capital to further help you with your short-term and long-term goals.
A good financial plan is also concerned with what happens to your money after you pass away. New parents should update their will, trust, and beneficiary designations as soon as their child is born to reflect changing wishes.
A financial toolkit can help actualise your financial plan and give you more control over your income. Included in your toolkit are your ‘spending tools’, which are your methods for making payments and include cash, debit and credit. There are certain situations where one may work better than the other – however people usually use debit as their default paying method.
Some banks on Island, including Butterfield and CIBC, offer the tools for you to manage your income in a way that reflects your financial plan. You can set up standing orders under different headings within your account and set the amount and frequency so each month your income is automatically divided into fixed costs, discretionary costs, and savings. Additionally, you can set up external standing orders for fixed monthly payments, including credit card bills, car payments, water, electricity, etc.
While the onus is on the individual to determine their own financial needs, banks and financial advisors can offer the planning and tools to provide customers with a total know-how for securing their family’s financial future.