Parenthood is one of life’s greatest gifts but with it comes great responsibility! Beyond 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. Georgie Loxton of Liberty Wealth has helped hundreds of families reach their financial goals and here she shares her tips for how you can start planning for the life you have always wanted for you and your family.
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Becoming a parent for the first time shifts one’s life and priorities. Realising that there is a human who is entirely dependent on you for everything changes how we think about things. Money, a part of life that is sometimes ignored, becomes more important. We want to provide for our children; either in the way we were provided for, or we want to provide the things that we never had.
Overnight, the cost of life increases and it forces us to look into the future. Financial planning is a process that is all about the future. It is a process that involves making guesses about what we want our life to look like and plotting a path to move us towards that future. It’s a process that involves balancing living for today with saving for tomorrow.
Money is a difficult topic for many people. We are never schooled in it. We are taught many things, but rarely how to think about and successfully manage our money. Yet, it’s something that is inextricably linked to every part of our life. It’s impossible to escape it.
Ultimately money is a tool. It’s not meant to be feared but used to create a life that makes our heart sing. We want to use our money to bring us the best life possible. We want to be empowered and to feel in control.
If we want to change the narrative about money for our children, then it helps to look back before we look forward. What did you hear about money as a child? What was your first memory of money? What did you parents teach you, if anything, about money? Ask yourself, are those beliefs about money serving you today? How would your life change if you shifted those beliefs? What do you want to teach your children about money? Challenging your beliefs and psychology around money will help you create a financial plan that you can stick to.
Building a Plan
The first step in building a plan is knowing why you are doing it in the first place. That is, asking yourself, why is money important to you? What is the purpose of money for you? This is a fun exercise to do with a partner—ask each other these questions.
If you can, construct a statement that encapsulates the purpose of money for your family. Think of it as your family mission statement. If you do this step thoughtfully, you will find that future financial decisions become easier and simpler, because you have a clear lens through which you are making them.
Understanding your Current Reality
Before we start setting goals, we need to know where we are today. Most people are fuzzy about this, at best. But you can’t manage what you don’t measure. This is where it helps to try and take the emotion out of it. There is so much shame and blame that comes with our current financial reality. The ‘should-haves’ and the ‘could-haves’ come into the conversation.
Here's the thing; we can’t change what has happened in the past. We are where we are today and can only look forward and commit to a process of change in the future.
The first step in understanding your current reality is to calculate your net worth. Take a piece of paper and write on one side everything that you own. That is, the cash in your bank, the value of your pensions and any investments you have, a guess at the market value of your home if you own one. We tend not to include depreciating assets in a net worth calculation, so you can leave out things like cars and boats. On the other side of the piece of paper write down all the money you owe. That is, any credit card debt, any money you owe family or friends, the mortgage on your house, any car or student loans you might have.
Your next step is to add up the value of everything you own and subtract the value of everything you owe. This figure is your net worth. It might be negative, particularly if you are young, and that’s ok. Knowing it is what matters.
Your net worth is your financial foundation—it tells you what you have done with the income that you have earned. Over time the goal of financial planning is to grow your net worth, through increasing your assets and decreasing your liabilities.
The other aspect of your financial life to get clear on is your cash flow. That is, having a true understanding of what is coming in and what is going out. The only way to know this is to commit to tracking your spending for a period of time. Even just a month of tracking will give you valuable information.
There are spending apps that you can use to track when and where you are spending money. The goal of this process is to bring awareness to your spending.
Once you have knowledge around what you spend, you can start to align your spending with your financial purpose. Are you spending money on the things that you say are important to you?
You can also categorise each line item into one of three buckets. The first bucket is your fixed spending—that is, your bills and other fixed expenses (mortgage, rent, school fees, utility bills, insurance, subscriptions and memberships etc.). The second bucket is your day-to-day spending—that is, the money you spend to get you through the day. This includes things like groceries, eating out, entertainment, gifts, clothing, household goods etc. The last bucket is your future spending. This is the most important bucket because this is how we prepare for life’s unexpected challenges and it is also the tool for achieving your goals. This bucket includes things like travel or trips, saving for your emergency fund, replacing your car, home improvements, education funding and retirement saving.
A good financial plan will include building an emergency fund containing at least three months of basic living expenses in cash and paying off all high-interest rate debt (credit cards) before working on other goals. A financial planner such as Liberty Wealth can help you work through your goals and construct investment portfolios that align with those goals.
Estate Planning and Protection
A comprehensive financial plan should incorporate estate planning. A good estate plan should specify who gets what after you die and provide for anyone who is dependent on you, especially young children. Without an estate plan in place, someone else will make the decision about who looks after your children and how and when your wealth is distributed.
Ensuring you have adequate life insurance is another important step in any financial plan. You should, at a minimum, have life insurance to cover any debts that you have. If you are the sole earner in your family and you have a spouse and children who are dependent on your income, you will need additional life insurance. A good financial planner can help you with your life insurance and will almost always recommend term life insurance as the best option.
Financial Planning as an Ongoing Process
Whilst a plan is useful, things never go according to plan. The process of planning is how we move towards our goals. We acknowledge that the assumptions we make will be wrong and because we change as people over time, our values and our goals change. Our goals are merely guesses about the sort of life we might want to live. It is important to revisit your financial plan to ensure it continues to align with your goals and values. It’s this process that moves us towards financial freedom and a life that we are proud to live.
