Financial planning for families with young children

Introduction

Key topic

In this lesson you are given a detailed presentation of the financial planning and budgeting process that will equip you with the necessary knowledge to exercise effective financial control in the household. Additionally, you are presented with several suggestions on how to set up a financially secure future, based on family needs, but also on the unlikely event of unforeseen financial hardships. Remember that this information, when put to practice, offers valuable lessons for your children as well, who need to be included in the process.

Learning objectives

• Understand the process of financial planning
• Plan on saving while earning
• Develop proper spending habits for the family’s needs vs family’s wants
• Discover the method and the importance of preparing a monthly budget
• Create readiness at home to combat unforeseen financial conditions

The financial planning process

The process of financial planning relates to determining whether and how your family can meet life goals through the proper management of financial resources. In other words, you should figure out where you are now financially, decide where you want to be later on, (for example 5-10-20 years from now) and devise a plan on how to get there.  Financial resources can be the parents’ salaries, any return from investments, sale/rental of assets and in general, any other source of revenues that come into the household, without excluding the possibility of inflow of money from loans.

The personal financial planning process is rather simple:  You figure out where you are now financially, you decide where you want to be financially in different phases of your life, and you devise a plan of how to get from where you are now to where you want to go.  The difficult part is to have the necessary discipline, consistency and flexibility to stick to your plan, re-evaluate it when necessary, and respond to unanticipated needs and desires in a logical manner.

Developing your financial plan will allow you to control your financial situation, thus enhancing your quality of life and reducing uncertainty about money-related issues, future needs and the viability of your children’s educational plans. Just like any other decision-making process, financial planning includes the following steps:

1) Determining your current financial situation

In this first step of the financial planning process, you will determine your current financial situation with regard to income, savings, living expenses, and debts. Preparing a list of current asset and debt balances and amounts spent for various items gives you a foundation for financial planning activities.  At this point, after you figure out your monthly income and monthly expenses, along with any debt and savings balances, you will become aware of where exactly you are financially; whether your spending is within your means, whether you under-spend and thus can save, or whether you over-spend and you have built up debt because of that.

2) Developing financial goals

Your financial goals are based on your financial dreams.  You need money to turn your financial dreams into reality.  These “financial dreams” form the basis and ultimate goals of your financial plan.  The ability to structure your dreams into something that inspires and motivates the whole family is the secret of turning these dreams into something tangible.  Deciding to pursue one of your dreams, transforms it into a goal, and finding the steps needed to accomplish the goal makes it part of your financial plan.  Your financial goals may be short-term like repaying credit card debt of US$2,000, medium-term like funding a family vacation a couple of years down the road, or long-term like sending your kids to college.

3) Creating and implementing a financial action plan

In this step of the financial planning process, you develop an action plan. This requires choosing ways to achieve your goals. Remember that in order to implement your plan, you may need assistance from experts (bankers, insurance agents, investment brokers etc.), thus choosing experts wisely also becomes a necessity.

4) Evaluating and revising  

Remember that financial planning is a dynamic process, meaning it changes very often and doesn’t necessarily have an end point. You need to regularly assess your financial decisions and your financial standing at that point. It is absolutely normal to make changes to your financial plan and you should not be afraid to do so; it is a trial-and-error sort of process, after all.

Financial planning and values

You should recognize that having the necessary discipline, consistency and flexibility to stick to your plan, without being hesitant to change the things that don’t work, is the cornerstone for success in this endeavor. Your financial planning should originate from two very simple things. One is your overall family goal and the other is the set of family values. These are the driving forces that should govern your decision making when it comes to financial planning.

All people have dreams and goals in life, for themselves and their families, such as buying a home, creating a business, saving for their children’s college education, travelling, having a good quality of life and of course retiring comfortably. We encourage you to make an effort in speaking out about these goals within the household and forming common goals with your children that will include their needs and wants, both short-term and long-term.

Moreover, your family should set forth a common list of values, which are the characteristics you consider to be important and tend to have a huge influence on the family by being a force that directs your lives. Values can differ and range from family wellbeing, health, love, comfort, friendship, different types of skills and education. All these values affect the decisions you make and also have a considerable bearing on the financial decisions you make as a family.

If there is a conflict between your values and your goals, your financial plan may become endangered and affect the quality of your life in a negative way. Your financial plan needs to reflect both your values and your goals, not the expectations of others or the societal norms. Your passion and dedication to this system of beliefs and the set of goals will guide you and help you stay focused and motivated to achieve them, thus moving forward.

Action Steps – Exercise 1 (5 minutes):

Even if you’ve never sat down to set the values governing the family finances you definitely have some based on your approach and attitude towards finances. Please name one and explain the logic behind it.

Differentiating between “wants and needs”

This is a very important aspect of a successful financial plan which must be based on the needs of the entire family, as well as the pre-existing means/resources/income to meet those needs.

You very well know by now, that “needs” and “wants” are two very different things that very sparingly coexist. Needs are the things that you cannot live without, or living without them would cause hardship and distress; they include housing, transportation, meals, healthcare, and any other means of simply surviving and living. Wants are those things that go beyond needs, which of course you would like to have, but are not necessary for your family’s survival. The tricky part is identifying correctly what is actually a need, because quite often we tend to disguise wants as needs.

Actually, differentiating between needs and wants is not as easy as it might first appear, due to the fact that a whole marketing science has been devised to shape the two by influencing our mindset and consumer behavior.  Inability to differentiate between the two, causes many people to spend recklessly, rendering them unable to save, invest or having the ability at some chosen point to indulge in their wants, even a little bit, which is always acceptable. There is a simple rule you should follow: “Spend money on the things that you need before you spend money on the things that you want.” Spending your money following this rule does not, at all, mean that you should only buy the things that you need.  Life is meant to be lived, not survived. Treat yourself to some wants, but do so when you can actually afford them.  Good money management is all about covering your family’s needs first and spending on wants only when you have extra money to do so.

As a family you will be faced with the conflicting choice of preparing for life ahead and the impulse to live and enjoy the present. You need to find a balance between the two, often having to make compromises for the sake of your children and their future. Start by understanding your spending habits and patterns, how much money you are currently spending on your needs and how much on your wants; something which will allow you to both save more money for the future and be able to spend money on things you want now.  Write down where you currently spend your money and try to review your expenses on a weekly basis. That way you can easily catch things you have spent more than you have planned and adjust your spending accordingly.

The best money management habit to adopt is to always live and save within your means.  By adopting this habit, you are a step ahead in your financial plan. The amount available for spending and saving is called disposable income.  It represents any income you have earned less taxes and other withholdings.  Your disposable income is what you have available to cover your needs, to spend on wants and to save.

Living within your means

Living below your means actually means that what you spend and save during a given timeframe, a month for example, does not exceed your disposable income.  It is advisable to first spend money on your needs, save a good part of what is left, and use the remainder to fulfil wants.  It is quite important to strike a good balance between spending money on wants vs needs and to save enough for the future. Living above your means is when you spend more than your disposable income; usually that happens when you use credit and you get into debt.  Consistently living above your means builds up debt which can prove to be disastrous to your financial plan.  This is one of the worse money management habits to have and it should be avoided. Living exactly within your means is when you spend all your disposable income on needs and some wants but you do not save any money at all.  Basically, this translates into uncertainty for the future, even if it does not create debt.

Learning to live and save within your means and knowing how to manage money, are some of the most important life skills you will ever master and of course these are the skills that you will need to teach your kids too, preferably by example. Adopting good spending habits and sound saving strategies will guide you towards a better future.

Let’s watch a 5-minute video and listen to Joshua Becker talk about the joy of living within your means:

The Joy of Living Within Your Means

Creating a simple budget

Irrespective of your financial situation and capabilities, your family should always have a budget and needless to say how good of a teaching point this is for your kids. Budgeting is an important tool because it helps the family understand the bigger picture and take a long- term approach in life. A budget is a summary of your expected income and expenses for a period of time, usually a month or a year. While the word budget may have been falsely connected with restricted spending, you should remember that actually a budget translates into efficient spending. The following steps are an easy way to prepare your monthly budget:

• Gather any financial documents you have available like bank statements, insurance bills, electricity and water bills and any other information regarding your sources of income or expenses.
• Write down all your sources of net (take-home) income and record the total as a monthly amount.
• Repeat the same process for all your expenses, but make sure you separate them into fixed and variable expenses. Fixed expenses will be relatively the same each month (i.e., mortgage, loans, utility bills, tuition fees etc.) while variable expenses are the ones that change according to your needs and wants (food, transportation, entertainment etc.). Remember that variable expenses are the ones which you will be able to adjust, as family needs change and when you need to balance your budget.
• Calculate the total of your monthly disposable income and monthly expenses and if you have more income than expenses, you are off to a good start. You can use this excess for savings or any other investments, or even repaying early any outstanding loans you have. If your expenses are more than your income, you will need to start making some cuts on your expenses or find ways to make more money.
• Try to adjust your spending so that your inflows and outflows are equal. This means all of your income is accounted for and budgeted for a specific expense, savings goal or investment.
• Review your budget on a regular basis in order to stay on track. At the end of the first month take some time to compare the actual expenses you made against the ones you wrote down in the budget as anticipated expenses. This way you can see where you did well and where you need improvement.

The most important thing in the process is to stick to your budget. If you think you need help with creating your budget you can start working with a financial advisor (especially if you can afford one), who will guide you and boost your accountability towards the budgeting exercise, thus making it easier for you to stick to your budget.

You may refer to the sample money budget below to understand better what is included in a monthly budget.

SAMPLE BUDGET CHART

Action Steps – Exercise 2 (5 minutes)

Having taken a look at the sample budget, does it look like the one you have (provided you have one)? Do you think having a budget helps? Is it feasible to have one and stick to it?

Saving while earning

As you may recall from the previous year’s lesson, we discussed the importance of financial preparation for the entire family in terms of sending your kids to college without a scholarship. Saving while earning is one of those things that can help you achieve this goal, but also many other goals that you may have in terms of your family and your quality of life.

One of the most common mistakes that families make, especially when their income is of a good standing, is failing to understand the need to implement a saving strategy; this strategy is imperative to the family’s financial security, but also vital for sending kids to college, let alone very helpful in the accommodation of some lifestyle upgrades down the road, or even corrective action in the case of possible financial setbacks. Setting aside money each month builds a foundation for establishing future benefits and even wealth.

Saving money should not be confused with investing and understanding the difference is vital. Your savings are money which you will put into the safest places or products which you can easily access at any time, such as savings and checking accounts or certificates of deposit; this money is usually FDIC insured.  When you have enough money saved, for emergencies and safety, you can then start investing. When you invest, you have the opportunity to earn more money, but you also have a greater chance of losing because the money you invest, for example in securities, mutual funds, or other similar investments is not insured.

You can follow some simple steps to develop your saving strategy, which must of course adhere to the goals of your greater financial plan that we discussed just a while ago. Automating your finances is crucial for implementing your savings plan.

You should start saving money according to what you want to do with it. We suggest you divide and allocate your savings into three basic categories: emergency, family savings and long-term savings.  Your emergency savings must be your priority and must reach the point where they equal to approximately a year’s worth of your living expenses.  Having emergency savings can reduce your worry in case any unexpected problems arise, especially with the employment status of the parents. If you are a single-parent family, it is easily understood that this emergency savings fund is ever more important.

Family savings are important for the overall quality of your life. They can be about a family vacation that you had hoped for in a long time, or an international tournament that your kids get to go to and you have the chance to combine vacation with accompanying the team to another country. It can be used for a medical emergency, or a purchase that adds true value to your family’s life such as a holiday home, or a boat, or anything that can be used to bring the family together and closer. It’s up to you to determine how much you must save each month to pay for these kinds of expenses, but do remember to include it in your family budget like we discussed.

Your long-term savings account is the backbone of your saving strategy and this is where you will hold the money that will be invested for a better financial future. Deposit money into this account every month.  You should make it a priority to deposit money in this account first, before you pay your bills or buy anything else. Your long-term savings is the money that will give you financial security to plan your family’s future, whether this is paying for college tuition, or creating your own business, or paying for your kids wedding, or having an extra cushion for retirement purposes.  Having smart goals in mind makes the choice to save—rather than spending—much easier.

It is to be expected that a family of working-class people will not be able to service all three types of savings at the same time. Start with the emergency fund, which is important for obvious reasons and work your way from there. Utilize any bonuses (Christmas bonus – performance bonus) for your family savings and start building your long-term savings once your emergency savings is at the point we discussed above.

Saving while earning is one of the most crucial financial goals your family should set and your kids should be encouraged to participate, especially in the family savings, from their allowances, special occasion gifts or any other sources of income such as summer jobs etc. It indeed is challenging, but it gets easier over time. Don’t forget that savings is the key to calling your own shots as a family and also the key to a better quality of life. By setting up and following your budget, you’ll see your savings grow over time. Start your savings plan now and reap the benefits every day of your life in the future.

Let’s watch a 7-minute video about the need for an emergency fund:

Why you need to have an emergency fund

Conditions of living that affect financial planning

If it’s one thing that the global financial crisis has taught us all is the fact that nothing should be taken for granted in today’s world. One day you are earning high and the next you are earning low; one day you are earning and the next you are without a job. Hopefully, this will not be the case for any of you, but it is a reality and a possibility, especially for the working-class and the hands-on workers. Medical reasons could render one unable to work for some time, with the added risk of health care bills running too high.

The best way to tackle it is to be prepared for it. This is the case when the family has to make ends meet with uneven cashflows and a disrupted budget that needs to be adjusted. In such incidents, the best possible treatment is to have your emergency fund in place which should be allocated according to your budgetary needs alone. Evidently, the family will have to readjust its spending to fit the new reality, minimizing unnecessary expenses.

Home ownership is another big issue that could unfortunately lead to people losing their homes and having to rent. Rent costs are amongst the greatest expenses in a monthly budget and the family should account for additional expenses that are not included in the rent, such as utilities and other amenities. When renting a property, it is important to be aware of your financial and legal obligations to the landlord.  Otherwise, you run the risk of losing your deposit when you move out and you may even face eviction.  Before you sign a rental agreement make sure you read it carefully, including all the small print.  Your responsibilities as a tenant will vary.  It is important to understand your rental agreement so that you know exactly what your responsibilities are.

Another condition that often times offsets a family’s financial plan is the need to purchase a new vehicle, especially when kids in the house become of driving age. Assuming that you decide not to utilize your family savings, smart choices should be made in purchasing an affordable and dependable car, whose insurance, maintenance, fuel consumption and other expenses can be reasonably met by the monthly budget.

Other cases could be discussed too, but the bottom line here and the take-home message is that you need to be prepared for any unexpected occurrences and the best way to be prepared is to have a well-balanced budget, a fully functional savings scheme and the determination to be fully disciplined in the long term in order to avoid financial risks.

Lesson wrap – up

The key takeaways from today’s lesson are the following:

• Personal financial planning helps you design your financial future.
• The circumstances and characteristics of your life influence your financial concerns and plans.
• The financial planning process involves figuring out where you would like to be, where you are and how to go from here to there.
• Different people have different financial dreams and each financial dream has a different price tag on it.
• Needs refer to necessities whereas wants refer to things you would like to have – something not absolutely necessary for your survival but which can add comfort and pleasure to your life.
• Money management styles reflect our attitudes towards money, spending and saving.
• A budget is a plan for how to handle your money and it serves as a roadmap to give you the money you need to live the lifestyle you want.
• Saving money is the cornerstone of a financially secure lifestyle. Saving allows you to build a foundation for establishing future wealth.

At this point the instructor should go over the learning objectives stated at the beginning of the lesson and take questions from parents.  An open discussion on the concepts taught and how they relate to the parents, their kids and the whole family should be encouraged.