There are a lot of factors to consider when having a child or starting a family – the hospital, babysitter, schedule and most of all the cost.
Many couples jump into parenthood without much planning and no thought as to how they are going to cope financially. Most people believe in dealing with all the extra expenses when the time comes with no planning.
They hope and pray that they will be able to pay for all the accidentals and incidentals as they come. Often this results in the couple taking bank loans, mortgaging the house and juggling credit card debts.
How much do you need?
Financial planner Elwin Lau says how much money you really need depends on the couple's lifestyle and whether both of them are working.
“It also depends on how soon they want to start a family, if they have their own house, or if they're renting, if they're paying loan instalments for their cars, where they intend to send their children for their education. There are a lot of factors to consider.
“To break it down further, it depends on the type of house they have bought, how much loan they have take and how long is the loan term. We also have to consider if they give funds to their parents or siblings.
“There are a lot of factors to consider and there is no clear cut way to find out if you can afford to have children and how much you need to start a family. It all depends on your lifestyle. There are some people who make RM2,000 a month and they're okay and then there are some who make RM5,000 and it's not enough.”
He adds that seeing a financial planner will help as the financial planner will be able to look at the couple's cash flow management. This is the amount coming in (income) and the amount going out (expenses) to see if it balances. Ultimately it's not how much you earn but whether the cash flow balances and whether at the end of the day there's a surplus in funds.
Work out a budget
According to Lau it is important to sit down and calculate how much you will need for a baby – the hospital cost, the price of a confinement lady, the child's education, how many children the couple intend to have and even go as far as to consider the cost of tertiary education for the child or children.
This way you can work out a budget and a savings plan for the next five or even 10 years.
Based on that the couple can then work out the best savings plan for their family.
“The financial planner would be able to show them how much the investment returns are if they put the money in the bank and if they need more then they need to invest more,” he says.
Lau admits that the total figure of how much money is actually needed per child may be quite frightening. Nonetheless, life must carry on, so the question is how much they need to save.
“A lot of people don't plan and the worst thing is when the child wants to go to university and you're left wondering where you are going to get the money from.
“Normally we try to fix a budget with fixed expenses and variable expenses. From a person's income, we say you save first, and the balance is for expenses (income-savings = expenses). This way you save for the long term for education, to buy a house, for retirement.
“But in most cases, people earn an income, they spend first and hopefully they try to save (income-expenses = savings).
“If your plan is to save for the long term and you have a long-term objective, then you try to live within the funds for expenses after the savings have been met every month. The savings fund might be to pay for the house, car, children's education, maybe to invest in a house,” he says.
Save first
A person who lives based on the Income-Savings = Expenses plan will have a better lifestyle than one who lives based on the Income-Expenses = Savings plan.
Although it may be tempting for the husband or wife to give up their job and stay home to take care of the children when there is more than one child, Lau advises against it.
“For more effective planning it's better for both husband and wife to be working. A dual income is better and they will be able to have a better lifestyle for the family.
“Although in the short-term it looks like you might be saving money if the wife stays at home to look after the children instead of sending them to the babysitter, in the long term it's very expensive because there is less income coming in and the expenses remain the same,” he says.
Types of investments
“In Malaysia for long-term savings, most people choose to invest in unit trust for their children instead of going directly to the share market, which research shows 90% of people lose money because they don't understand the mechanics of how the market works,” explains Lau.
Apart from that, a lot of people may buy insurance which is in the form of investment-linked insurance or endowment policy. These are the common choices in Malaysia.
Apart from that, a lot of people also buy properties. Hopefully the property will appreciate and when the children need the money, they can sell the property. That is another alternative, says Lau.
“What type of investment you choose will depend on your risk profile. Some people have a risk profile that is more aggressive and others are not so aggressive. If the person is too conservative the returns won't be high.
“We come across a lot of housewives and even some working mothers who prefer to put their money in fixed deposit. It earns less than 4%. With inflation at 8-10%, let's say 8%. So you earn 4% but you lose 8%. So your money is not working hard because you are left with -4%. But they don't see it. They see it as they still have a 4% interest. They don't see that their purchasing power has lessened.
“Most of the time your risk profile also depends on your age. If the couple is young and just starting a family then we advise them to think more long-term and have a slightly more aggressive risk profile.
“But if the couple is older and starting a family later in life we advise them to have a medium risk profile, not too aggressive. That will be the general guide,” he says.
Risk management
However, before going for any form of investment, Lau cautions couples to take care of risk management. This means protecting the income as everything – the lifestyle, investments, savings – come from the income. To protect the income means life insurance for the bread winner.
If anything happens to the bread winner and there's no insurance, then the whole plan is gone. It is best to prepare for any eventuality.
His parting advice to those wanting to start a family?
“Ultimately, we look at the cash flow management. That cash flow will determine the lifestyle. But the couple needs to be honest about income and expenses. The balance sheet should be as close as possible to reality. And, you should review the plan after each year to see if you stick to it.”
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