Let’s face it parenthood changes everything. From your social life to your ability to go to the bathroom in peace. Things are no longer just about you and your partner, there are other considerations that must be made. With parenthood also comes extra financial responsibility, there are extra costs and quite often less income coming in the door as one partner stays home or changes to part time work.
So here are five financial tips that you need to know now you are a parent:
- You should make sure you have a Will. I know you don’t want to think about it, but a Will is crucial in making sure that your children are well looked after should anything happen to you, your partner or both of you. It gives you the ability to say how your assets will be distributed and even who should have custody of your children should the worst case scenario occur. If you have complicated family relations then a Will is even more crucial to ensure that your wishes are clear. A Will doesn’t have to be expensive, you can get a Will kit from your local newsagents, do it online or do it through your solicitor (definitely worth the money if your affairs are complex). If you already have a Will make sure it is updated to account for any changes in circumstance such as additional children or divorce.
- You should consider Life Insurance. If it would be difficult for your partner to raise your children without your income, then you should have life insurance. The same is true if you couldn’t afford to raise your children without your partners income, then you need life insurance on your partner. Without trying to sound like a bad daytime TV ad, life insurance will give you peace of mind. If you already have life insurance, you must check it and make sure it is enough now you have children.
- Get rid of your credit card debt. There are several things the banks won’t tell you about your credit card. Number one is that credit card debt is crazy expensive. Generally speaking the banks charge you about 19% on your credit card, compared to official interest rates of 2.75%! Secondly, if you pay the minimum repayment it will take you an eternity to get rid of it. Just check your statement. The banks now have to tell you how long it will take to pay off your balance at the minimum repayment. Last time I checked mine, it was 64 years and 7 months! The only way to use a credit card is to pay it off every single month. If you can’t do this then cut it up and ramp up repayments to pay the debt down. Please click here to see my top tips for getting rid of your credit card debt.
- Make sure you have an emergency fund saved. You should aim to have six months of after tax income saved to ensure that you have the confidence to deal with any bumps in the road that life might bring like another baby or losing your job. My mother always told me that when financial problems walk in the door love flies out the window. Having an emergency fund helps to relieve financial stress when things inevitably do not go to plan.
- Be aware of the huge tax rates that can be charged on savings in your child’s name. Most people don’t know this but investing directly in your child’s name is unlikely to be the most tax effective way of saving for your child. This is due to tough penalty taxes for minors. The penalty tax is applied to “unearned income”, that is money the child has not worked for and includes income such as interest, share dividends and distributions from trusts. If you invest under your child’s name, the first $417 of unearned income is tax free but after that tax is charged at 66%! Any unearned income after $1,308 is taxed at 45%! Ouch! (Click here to see my full post on tax rates applied to children’s investments)
Parenthood changes everything. I hope these tips help to better navigate the financial responsibilities that come along with it.
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* Please note this is for your general information only and does not constitute financial advice. Please see a financial planner or accountant to get advice specific to your individual needs.