Financial Planning, from a Father’s perspective (Part 2)

2. INVESTING

This, to me is the area that is something we must cater for, regardless if we have life-cover or not. A common mistake I believe we make is putting funds into an endowment or long-term product that provides for tertiary education. I don’t believe that it is necessarily wrong, but I believe we could use other tools more effectively to get to the same result and provide for more needs along the way. An example of this is a Tax-Free Savings Account. This product uses a unit trust as it’s base and will be more tax efficient and be a huge savings vehicle for education if managed right. The bonus is that it is fully accessible prior to the varsity years. So, if little Johnny needs speech therapy, or Lerato requires extra classes to get those university entrance criteria, you can use the funds immediately. Bear in mind that you are limited to R33,000 per person, per tax year, and a total of R500K in his/her lifetime as a contribution. This again highlights the need for a financial planner to tailor-make a solution to the need.

THE DIFFERENCE

An educational plan in the form of an endowment is limited to a maximum of 20% extra contribution per year. It also becomes a problem, in my opinion, if you get retrenched or hit tough times. If you can’t continue with the premiums, you may face penalties being charged on the investment, eating away at the saved capital. Another factor is the type of funds that you use within the LISP or investment product. The funds determine the return. The time-period will also be a determining factor towards the risk profile of the fund.

Wrapping up

Having a child brings great responsibilities. These responsibilities, if planned for correctly, need not be something that keeps us up at night. As parents, we hope and dream for the best, and half the time wish we could bubble wrap our children to protect them from the world. We may not be able to stop them from falling, but we can keep them up when we fall and can’t get up, by ensuring our life cover and Wills are in place. We can also set up a firm foundational platform for their dreams by diligently investing. As I’ve said throughout, just like a parent guides a child, we need financial planners to guide us on what to do in getting a tax-effective-plan, catering for our kids’ needs in the future.

Financial Planning, from a Father’s perspective

I am a new and very Proud Dad. I am also a financial advisor (FA) and in recent months have had many changes, some planned and many more unplanned, to weave my way through. My viewpoint in terms of life, finances, goals, and concerns has changed considerably. Let me share and give insight towards key decisions I am making, which I hope will guide and assist you too.

Even the brave

Even the brave can stand shaking in their boots at the news that they will soon be responsible for their very own child. Whether you have planned carefully for the event and are overjoyed, or even more so when the news is unexpected, you undoubtedly spend time contemplating how your life will never be the same and run through the many adjustments and sacrifices in your head.

Reality sets in

Having a child is a scary and wonderful prospect for most new parents. I am extremely fortunate to have a wonderful, supportive wife to lean on and help in deciding on life’s next steps. My daughter is now a few months old and we’ve considered numerous eventualities in the preparation for the cost of living, schooling and the dreaded “what if I’m no longer around to take care of her?”.

It has made me relook my own financial plan, from a completely different perspective.

Why Planning Matters?

Recent studies have shown that to send your child to a private school from grade R (0) to 12 (Matric), would cost you an estimated R3.7 Million. Then, paying for your little one to get a BA Degree at a tertiary facility, costs in the region of R190K – R470K. And this is just the educational aspect―forget about the day to day―of raising a child. I was rather surprised to find out that sending my daughter to a crèche (nursery school), cost more than the current primary school fees. I am sure parents reading this article, who are currently paying these fees, will support this point. I was shocked!

The planning advice that I will use

So, what can I as a financial planner and new parent, offer in terms of advice? Advice, which I believe I should be following too.

I would break it into two areas; one being Risk and the other being an Investment.

1. RISK

We run the usual risk of dying too soon, becoming disabled, and getting sick or being retrenched. It’s the reason we have grudge purchases called life cover etc.

It’s critical to have these measures in place, together with a proper Will and Testament (not a CNA special). I say this, as it has been my experience that trying to take shortcuts with our financial planning usually leads to shortfalls.

You need an experienced financial planner, who understands not just the legislation and products, but also your situation. Too often, we have sales people and not financial planners guiding clients.

So, my first piece of advice is that you should look at your liabilities, and the costs of providing for your family, including your child’s needs and education. Ask yourself, “What if I’m not around to take care of them?

Something many people forget

One must bear in mind that just providing for your kids, and not factoring your spouse or children’s guardians in, will not necessarily mean that your intended goal of making provisions for kids, will be achieved. If you have minors, they can’t manage the funds you leave behind. This will be managed by a guardian, spouse or Trust. This also highlights why we need a Will.

Will allows for the provision of a Testamentary Trust, that will impartially oversee the funds and make payments to the elected beneficiary/ies, while the funds are held by the Trust and the child is considered a minor. School fees, child maintenance, etc. can be provided for from the Trust while there are sufficient funds.

How much life cover, disability protection etc. is required, will be determined by your financial situation, affordability, and lifestyle. All factors a financial planner will take into consideration. There are products specifically designed to provide for education on a risk product too. But bear in mind that if you don’t die early, or become disabled, the full educational cost or even a portion may not be provided for with such a product. And the likelihood of death or disability happening is less than it would be that your child reaches those needs while you are still alive and kicking.

 

That leads me to my next area…investing.