Building your ‘Family Future Fund’

How much does it cost to raise a child? Obviously the answer is highly dependent on individual circumstances. However, as a guide, a 2013 national study[1] found that a typical middle income family would spend about $812,000 on raising two children from birth to age 24. At that time child-raising costs were increasing at around 9% per annum, so it’s a reasonable estimate that these days the cost of getting two kids to the point where they’re ready to leave home (that’s not to say that they will) is closer to $1.36 million! And that’s a middle of the road figure.

For low and middle income families transport is, perhaps surprisingly, the biggest single cost, but for high income families, education takes top spot. Along with childcare it eats up over a quarter of the household budget. That’s largely due to the costs of private education.

The Australian Scholarship Group, (ASG), estimates that providing just one child with a private education from pre-school to the end of high school will cost close to $545,182[2]. Opt for the Catholic system and that drops to around $132,635, while a government education comes in at roughly $75,726. Supporting a child through university adds substantially to these costs.

 

Creating a ‘Family Future Fund’

Being forewarned about the costs of children, particularly educating them, provides an opportunity to prepare for the hit to the family budget.

Take Ben and Laura, a young professional couple with a combined after-tax income of $150,000. They plan on starting a family in a few years and after allowing for other financial commitments decide to set aside 25% of their net income for their ‘family future fund’. Opting for the safety of a high interest savings account their return after tax is 2% per annum. When baby Rose arrives five years later, they have a head start of just over $195,000 in meeting future child-raising costs. But babies and toddlers are relatively cheap to support compared with older children, so Ben and Laura don’t need to dip into their fund just yet. This is just as well as they are forced to stop their regular contributions when unpaid parental leave puts a dent in their income. When Rose is ready to start school at age five the family fund has grown to $215,463.

Matt and Sara on the other hand only begin to think about their future family costs when their first child Thom is born. To match Ben and Laura’s savings balance by the time Thom starts school, Matt and Sara would need to save $41,400 per year – for them and other young couples this is an impossible challenge.

 

Savings options

A child’s ‘future fund’ is not something to speculate with. This means opting for ‘safer’ investments such as cash, term deposits or bonds, despite their generally lower returns. Alternatively, tax benefits may be gained by investing in insurance bonds or a friendly society education plan.

Another possibility is to pay the savings into a mortgage offset account. This will provide a return closer to the home loan rate, which is likely to be higher than interest rates currently available elsewhere. Funds can then be redrawn as school fees or other costs require.

While every family is unique, the costs of raising children are quite staggering. The sooner you talk to your licensed financial adviser about how you can plan the financial side of family life, the more enjoyable parenthood can be.

[1] Conducted by the National Centre for Social and Economic Modelling (NATSEM) in conjunction with AMP.

[2] Figures estimated by ASG relate to a child educated in a capital city.

 

Book an appointment with our experienced team today to explore your financial options.

Five ways to benefit from record low interest rates

Interest rates have never been lower, and it’s possible they might fall even further. This creates opportunities for householders and businesses, so how can you best take advantage of low interest rates?

 

  1. Pay off your debt more quickly

By maintaining constant repayments as interest rates fall, you’ll reduce the time it takes to pay off your loan. That’s because interest will make up less of each repayment, with more going to reduce the outstanding capital. And the great thing is that to take advantage of this strategy you don’t need to do anything. Lenders usually maintain repayments after a drop in interest rates, unless you instruct them otherwise.

 

  1. Refinance your home loan

Lenders vary in the extent to which they pass on cuts in official interest rates. So if you want to reduce your loan repayments it might be worth shopping around to see if you can find a better deal from other lenders. Just make sure that, if switching lenders, you take all fees into account to be certain you really are saving money.

If you are restructuring your borrowing another thing to consider is fixing the interest rate on all or part of your loan. This can provide protection from the impact of rising interest rates in the future, though it may mean you benefit less from any further cuts in rates. However, with interest rates already very low, there is little  room for rates to fall much further.

 

  1. Buy a first home – or upgrade

Low interest rates create opportunities for first homebuyers to get a foothold/toehold in the property market, and for existing homeowners to upgrade to a bigger home or better location. While lower interest rates can be a bit of a two-edged sword, as they tend to drive up property prices, most people are happier borrowing in a low rate environment rather than when rates are high.

 

  1. Borrow to invest

While Australians love to invest in property, borrowing to invest in shares is also a viable wealth creation strategy. Often referred to as gearing, the key to successfully investing borrowed funds is that the total returns must exceed the total costs. As the most significant cost is usually the interest on the loan, low rates make this strategy more attractive.

Take care, however. Gearing can magnify investment returns, but it can also increase your losses. It’s therefore important that you fully understand investment risk and how to minimise it.

 

  1. Expand your business

The whole point of a reduction in interest rates is to stimulate the economy, and that includes encouraging business owners to invest in their enterprises. Low interest rates make it cheaper to borrow to buy equipment to increase productivity, to take on more staff, or buy out a competitor and generally expand the business.

 

Take advice

Some of these strategies are simple ‘no-brainers’. Others involve significant levels of risk. To take a closer look at how you can make the most of low interest rates, talk to your financial adviser.

Talk to us to find out more.