Friday, February 23, 2018
5 Must Have’s for Family Financial Planning
Getting all your financial ducks in a row is not always easy, especially when you have children. Kids take up a lot of your time and of course a lot of your money. When they are growing up it can be easy to worry only about them and their well being. It is important to understand that a large portion of their success comes from the fact that you are successful. This includes maintaining positive cash flow, staying out of debt and planning for the future. Having the right products in place to secure your goals is important as well. In today’s post, I will describe the 5 items you will need as a parent to be financially successful. While obtaining these all at once might be tough, you will have to work them into your financial plan over time.
I cannot stress enough how important Life Insurance is for anyone who has a kid. A simple way to look at it is through strict cash flow analysis. Most families require two incomes to survive these days. If one of those was gone, what would happen? Write up a budget based on only one of the parent’s income and see the results. Even if one of the parents stays home with the children, life insurance is still crucial. If the working parent is gone, the finances are obviously devastated. If the stay at home parent is gone, who will look after the children? Will a nanny have to be hired? I have seen families lose homes, kids miss out on college and severe financial disruption from the loss of a parent. Taking the basic step of protecting yourself with life insurance is key to any family’s success. It can be very cheap, sometimes even less than a buck a day. This one step should be looked at before any other because it is that important.
Kids zap your bank account like it was water. Having a reserve of funds just in case is vital to any family’s success. Many households are living paycheque to paycheque and use credit as an emergency fund. This can cause debt to accumulate and long-term financial planning to suffer. When debt must be paid down the first place one goes is the retirement funds or the home equity. This prolongs the savings process and hurts your overall monthly cash flow. Having an emergency fund of 3-6 months expenses will allow you to weather any storm and not go into debt over a broken water heater. It is always better to borrow from yourself rather than to borrow from the bank or your VISA card.
Disability and Critical Illness Coverage
When you get sick or injured it is important to know that your basic living expenses will be covered. Simply put, you will go into debt if you do not have coverage to weather medical storms. Government-funded disability payments amount to less than half your income and that is only if you qualify. Many workplaces do not offer disability coverage and the ones that do often have substandard coverage amounts. This can leave you exposed at a time when you need that money the most. Most of us cannot survive on 50% of our income, let alone no income at all. Putting into place a financial plan that includes living benefits coverage is important to your family’s success. Critical Illness coverage pays you a lump sum should you develop one of several serious illnesses. Both forms of coverage have options to get your money back if no claim is made. While insurance is boring and not fun to talk about, it can be the difference between achieving your goals or living in poverty.
Registered Education Savings Plan (RESP)
The RESP was designed to allow for parents to save for their child’s education in a tax-deferred vehicle. What this means is that contributions to the RESP are made with after-tax dollars, so the account grows tax-free. Withdrawals from the RESP are made by the recipient (child) and they pay taxes on the withdrawals at their marginal tax rate. Why this is attractive is because when a child is in post-secondary education they pay little to no taxes thus making the RESP virtually tax-free. Another reason the RESP is so attractive is that contributors have access to the Canada Education Savings Grant (CESG). The CESG is designed to complement the RESP by adding additional funds to the account. The government may contribute up to $500 annually and up to $7,200 in the lifetime of the account. Low-income contributors are eligible for the Canadian Savings Bond which will also contribute money annually even if deposits are low. The lifetime contribution amount for the RESP is $50,000. Free money is the best kind of money in my humble opinion so taking advantage of this product is a must.
While being a parent can be financially difficult, you must think about the time when the kids are gone. Saving for retirement must be started as soon as possible, even if you have young children in the home. While money may be tight, you cannot skip this savings step. The reason why it is so important is that when you are young, time is on your side. The older you get, the tougher it is to save for retirement. While it is still possible to retire comfortably even if you start later in life, you will have to get extremely aggressive with your savings amounts. Whether it is through personal savings with a Registered Retirement Savings Plan (RRSP), or with a Tax-Free Savings Account (TFSA), or with your workplace-sponsored pension plan, you must contribute something to retirement savings. Failure to do so might leave you too little time to catch up later in life. Workplace retirement plans can be especially useful if the employer matches contributions. This can make your savings grow exponentially. While you are young, you should sacrifice immediate gratification for the long-term goals. You will thank yourself later in life trust me.
Taking the right steps as a parent to make sure that your family is successful doesn’t have to be tough or expensive. Everything should work within your budget to make sure you are covered for today and tomorrow. While this sounds like a lot of things for you to do, it can be done in stages. An easy start is to put in a life insurance application and see where you stand. Focusing on the emergency fund will be the next target for your family. After that, you can tackle the other tasks with the confidence it will take to succeed. It all starts with positive monthly cash flow so take some time and address your monthly budget. You will be very happy that you now have the right mentality to accomplish any goal including raising successful children.
Thanks for tuning in for Family Week here at Budget Boss. Tune in next week as we jump into another great topic regarding personal finance. If you have any questions regarding investments or insurance, please do not hesitate to contact me at firstname.lastname@example.org and I would be happy to help. Have a great weekend Bosses!
“The key to success is action, and the essential in action is perseverance.” – Sun Yat-sen
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