6 Steps to Better Financial Planning for New Families
Parenthood is an exciting journey for new parents, filled with as much joy as it does challenges. Managing a family budget can become even more challenging with the arrival of a child, as new expenses emerge and existing financial plans may need revisiting.
A structured financial planning journey can empower you to meet your family's needs effectively. Here are the key steps:
Step 1: Create A Family Budget
Welcoming a newborn into the family requires you and your spouse to reassess your financial situation thoroughly. Your budget must account for new expenses, such as your little one’s daily necessities, childcare, and medical check-ups. This revised financial plan will also need to make space for your child’s longer-term needs, like tertiary education. As you navigate these immediate changes, it's equally important to anticipate and plan for future expenses that may not yet be on your radar.
Here are some financial tips for families to calculate potential expenses:
- Lists All Potential Costs: Short-term costs include paediatrician visits and vaccinations for your little one, while long-term costs encompass daily needs, such as clothing and regular healthcare visits.
- Evaluate Your Family's Net Income: Write down your net income and tally the potential costs. Assess your current financial situation compared to your earning power, then consider how your expenses and income may change with the arrival of your newborn.
- Tools and Apps for Tracking Your Budget: Tools and apps are especially helpful for new parents who might find themselves overwhelmed with the new expenses of a growing family.
Step 2: Establish an Emergency Fund
One guiding principle to follow when planning your family's finances is to have an emergency fund for unexpected expenses, such as emergency medical treatment for your child. Setting up emergency funds in separate bank accounts from your savings account can serve as a financial safety net.
The general rule of thumb in family financial planning is to save enough to cover three to six months' living expenses. This amount provides a cushion to cover essential costs like utilities, groceries, transportation, and other necessary expenses.
This number is flexible, of course, and scales according to factors like job stability and health. Consider your and your spouse's income and the average monthly expenses. You might want to aim for six to nine months of savings if either you or your partner has a more volatile income source, such as freelancing or commission-based work.
How to Prioritise Your Emergency Fund
If you’d like to prepare your family emergency funds in a short amount of time, here are some financial tips you could use to stay on track:
- Set Clear Goals: Determine the amount you need to save for your emergency fund, then break it down into monthly savings goals to make it more manageable.
- Automate Savings: Set up automatic transfers from your checking account to a dedicated savings account to plan your finances more efficiently.
- Cut Unnecessary Expenses: Review your monthly expenses and identify areas where you can cut back. Redirect these savings into your emergency fund.
Step 3: Understanding and Purchasing Suitable Insurance
Besides saving your income, you can consider fortifying your financial plans with Investment-Linked Plans (ILPs). Depending on your needs, specific policies can cover critical aspects of your and your family’s life and health.
For instance, health insurance can cover any medical expenses borne during the first few years of your child’s life, while life insurance provides support for your dependents in the event of untimely death.
Step 4: Planning for Education Expenses
Education expenses cover all schooling costs, starting from early childhood and extending into university education. Planning these expenses ensures you have the funds to support your child's educational journey without financial strain.
There are several effective ways to save for your child's education:
- Child’s Education Plans: These are endowment savings plans that help you save and grow your savings for your child’s education fees. These plans also aim to grow your savings with higher returns so you have more funds to spend on your child.
- Trusts: Trusts provide flexibility and control over the distribution of funds, ensuring that the money is used as you intended. However, trusts may require a higher principal amount to start than most other saving methods.
- Other investment vehicles: Insurance saving plans like Gro Cash Flex Pro can help alleviate your child's education expenses. With capital guaranteed upon maturity, get back at least all of the premiums you have paid, excluding premiums on optional rider(s), on top of the non-guaranteed bonuses. This applies to policies paid yearly only.
Step 5: Investing for the Future
Investing for the future is a critical step in financial planning, especially when preparing for long-term goals like moving to a bigger home or securing your little one’s higher education. This step involves more than saving money; it requires a strategic approach to grow your wealth effectively over time.
Several factors should be considered before you decide to kickstart your investment journey:
- Determine Your Financial Goals: Identify what you are saving for. Whether it's your child’s education, a new home, or a comfortable retirement, these specific goals should drive your investment decisions. Each goal may require a different investment strategy and timeline.
- Assess Your Financial Situation: Take a comprehensive look at your current financial situation – your income, expenses, debts, and other financial commitments. Understanding your cash flow will help determine how much you can invest and the emergency funds you need to maintain.
- Understand Risk Tolerance: Assess how much risk you are willing to take in pursuit of higher returns. Remember, higher potential returns usually come with higher risks. Riskier avenues with potentially higher returns may not suit your palate now that you have a family, especially when any loss can impact your financial stability.
- Consider your Time Horizon: If your goals are long-term, you might lean towards riskier options like stocks, which can recover from dips over time. Younger parents may prefer higher-risk, high-return investments, given their extended timeframe, while older parents may choose stable, conservative options to ensure quick access to funds. This age-focused strategy tailors your investment plan effectively.
Investing is crucial when keeping up with inflation. Despite a decrease from 7.5% in 2022 to an average of 2 to 3%, families must remain prepared and establish a solid foundation of savings. Key strategies include:
- Diversifying Investments: Spread your investments across various asset classes such as stocks, bonds, real estate, and commodities. Diversification helps reduce risk by not putting all your financial eggs in one basket and allows you to capitalise on the growth potential of different markets.
- Regular Savings Plans: Committing to a regular savings plan that will allocate a certain percentage of your income to investments can help accumulate wealth steadily over time, leveraging the power of compounding.
- Investing in Inflation-Protected Securities: Consider allocating part of your portfolio to inflation-protected securities such as Treasury Bills or Singapore Savings Bonds. These are designed to increase in value along with inflation, ensuring that your investment's purchasing power is maintained.
- Equity Investments: Stocks have historically outperformed other investment types over the long term, including periods of high inflation. Investing in equities, particularly those in sectors less sensitive to economic downturns or companies with strong pricing power, can provide growth exceeding inflation.
- Review and Adjust Your Portfolio Regularly: Keep track of economic indicators and adjust your investment portfolio accordingly. Regular reviews help ensure that your investment strategy aligns with current economic conditions and your family’s financial goals.
Step 6: Protecting your Financial Plans
Securing your financial future involves more than just making the suitable investments; it also means protecting those investments and the overall stability of your financial plan. Here are key strategies to consider:
Legal considerations to protect family finances
Having a clear and legally binding plan can safeguard your family's financial future, ensuring that your assets are distributed as you intended. These legal considerations include:
- Wills: Creating a will is crucial for ensuring your assets are distributed as you planned after you pass away. It outlines inheritances, can potentially reduce tax burdens (through strategic asset distribution), and may help avoid or simplify the probate process. A clearly documented will also helps prevent family disputes over your estate.
- Power of attorney (POA): A POA will appoint an advisor to manage your finances and uphold your investment strategies if you become incapacitated, ensuring your financial responsibilities are maintained.
- Guardianship designations: Designating a guardian in your legal documents is essential for minors or dependents needing care, empowering them to make key decisions about the child's upbringing, education, and health.
Review Financial Plans to Adapt to Changing Family Needs
Reviewing your financial plans can make for a more adaptable strategy that addresses your family's needs as they evolve, ensuring your steps toward a solid financial future remain on track.
Consult a financial professional to manage and update your planning, reflecting your current wishes and economic situation. You can also diversify your investments and assess your budget, cash flow, and net worth comprehensively.
Aim to review your financial plan at least annually, aligning with significant life changes like having a baby or purchasing a home, to keep your savings goals relevant and achievable.
Plan Early for Your Family's Finances Today
Financial readiness for new and expecting parents involves crucial steps that ensure long-term stability and security. While they cover most of the fundamental areas, parents should still adapt their strategies to effectively manage their financial responsibilities and safeguard their family's future.
Speak with an Income Insurance financial advisor today to map out financial goals that can support your growing family. Explore Income Insurance's range of policies and enhance your family's financial planning for a more secure future.
1 Capital guarantee on Gro Cash Flex Pro excludes any optional rider(s), on the condition all premiums are paid, and that the policy is held until maturity date with no policy alterations or claims made during the entire policy term.
2 Bonus rates are not guaranteed and will vary according to the future performance of the Life Participating Fund.
This article is meant purely for informational purposes and does not constitute an offer, recommendation, solicitation or advise to buy or sell any product(s). It should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income Insurance products mentioned are specified in their respective policy contracts. Please seek independent financial advice before making any decision.
These policies are protected under the Policy Owners’ Protection Scheme which is administered by the Singapore Deposit Insurance Corporation (SDIC). Coverage for your policy is automatic and no further action is required from you. For more information on the types of benefits that are covered under the scheme as well as the limits of coverage, where applicable, please contact Income Insurance or visit the GIA/LIA or SDIC websites (www.gia.org.sg or www.lia.org.sg or www.sdic.org.sg).
This advertisement has not been reviewed by the Monetary Authority of Singapore.
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