How do you start financial planning for your family?
You may have gotten married recently or even welcomed a newborn in your family, and the financial picture of your future is evolving. Soon the kids will become young adults, reducing your actual cash flow as they will need financial support for their studies and other needs.
What about your retirement planning? How about a plan for a comfortable retirement? Is life insurance enough to protect your loved ones? There are all topics you may be asking.
Life is made of big changes and can be unpredictable. You might want to plan a budget for your family that will allow your family to live comfortably today as well as provide financial security in the long-term.
In addition to working with a certified financial planner, this article on family financial planning can help you jumpstart your financial plan.
Fine-tune your money management with the help of this specially tailored guide for families!
Including your kids in a conversation about money will give your family financial plan real staying power. Children's education about finances can start at a very young age as they have a notion of more or less. All too often, families treat the topic of money as a conversational taboo; however, financial literacy and responsibility (should) often begin at a young age. Family conversations about money will unify everyone around common financial goals possible to achieve through strategic spending, saving, and investing.
Here are a few tips for teaching your children about money.
For older kids, it may be time to start thinking about how to help fund their higher education and to learn about the concept of loans and debt. Encourage your children to kickstart college savings through part-time jobs. Help them learn about scholarships, student financial aid programs available through the federal and provincial/territorial governments, and government-subsidized student loans which can lower future tuition expenses.
Of course, you could open a Registered Education Savings Plan (RESP) - more on that later. But it's always good that your adult children have their own financial goals. Secondary education is costly in Canada, and children should be set up for success as they enter into young adulthood.
Encourage your children to have their own financial goals and search for other solutions than personal loans to finance their education. Government financial aid programs can help lower the debt you might have to otherwise take on to finance tuition fees.
Financial aid can come from a variety of sources and can include:
As your kids get closer to college age, they might have enough money to finance their studies without taking any personal loans!
Finally, here is an idea of a workshop all the family members will enjoy as it will give the feeling to everyone to play an active role in family financial planning.
Now that everyone in your family understands the importance of financial planning, it's time to set goals and manage the family finances hands-on. And for that, a family budget is a must for many families to stay on track.
Ideally, your monthly family budget should include savings to build an emergency fund and investments in different financial products. Depending on your family's income, it is typically recommended to set aside 15 to 20% of your income each month.
Get in the habit of saving money first before spending the remainder of your paycheck; otherwise, it may be difficult to set money aside for your retirement savings or insurance products. It’s important to long-term aspects of financial planning that don’t give as much instant gratification as spending your money on immediate wants.
As a rule of thumb, your housing or mortgage should ideally not exceed 30% of your budget.
Utilities should be a minor part of your family's financial plan: a range between 5 and 7% of your budget is considered the acceptable norm.
Depending on your income, it would be wise to devote between 1-40% of your budget to a life insurance plan to protect your family. This plan allows your family to receive a lump-sum payment should you pass away unexpectedly. And while a range of 1-40% seems vague, there are a number of unique factors that determine how much insurance is enough to cover you and your family. A licensed insurance agent will help you determine what is appropriate for you.
Finally, groceries are the most challenging line in your family budget as it is variable each month. Here is a tip for budgeting your groceries: plan your meals! If you have your list of ingredients ready, you will be less likely to buy food you don't need or order last-minute, pricey take-out or delivery.
Your whole family knows now that they have an active role in family financial planning. There's nothing better than setting a common goal to get everyone involved!
Pick up the family vision board and put it on the fridge or in a shared space. Everyone should be able to see it and be aware of the financial goals of the family, whether that’s finishing paying down the mortgage, saving enough for a family vacation, or paying for summer camp.
Having this goal in sight will keep motivation high!
Track expenses to identify and plug budget leaks. What are the spending categories that were consistently higher than you had budgeted? Observing your spending habits will allow you to regulate your unexpected expenses from month to month.
If, on the contrary, you have more money left at the end of the month, it can be an excellent opportunity to invest the difference. These extra dollars could go towards a life insurance plan or disability insurance that can come in handy down the road.
According to a survey from 2019, "Canadians who actively use digital tools for budgeting are among the most likely to keep on top of their bill payments and monthly cashflow."
Free digital tools such as Mint or PocketSmith can help you track expenses for better budgeting.
Mortgage refinancing can be a great way to lower your mortgage payment or pay off your mortgage faster depending on your goals.
It might be challenging to cut back on groceries, especially with children in your care. How do you spend less with kids?
Small habits affect big-picture goals. Toys, games and clothes do not necessarily represent an obligation to spend and harm your finances. From buying groceries in bulk (thanks Costco!) to purchasing kids’ clothing and toys second-hand to, scouring the web for all-inclusive resort vacation options where kids stay free, there are hidden ways you can lower your expenses without lowering your expectations.
You may belong to what is known as a sandwich generation. Sandwich generations are defined as people responsible for both bringing up their children while caring for their aging parents. You even may still have your own expenses and/or debts to pay. So how do you take care of your nuclear family plus your aging parents? By planning your investments, maximizing your savings and investing room in registered accounts.
Here is a quick overview of registered accounts:
RRSP is your Registered Retirement Savings Plan. You will pay taxes only when you withdraw the money at the time of your retirement or when you reach the age of 71. Your RRSP termines when you reach 71, after which you can choose what you want to do with the funds.
However, it’s worth noting that RRSPs came come with a relatively steep tax penalty should you withdraw funds before maturity, although exclusions apply. As such, RRSPs are NOT meant to be withdrawn from as you would with a savings accounts or TFSA if you can avoid it.
Proactively planning for your retirement - whether you’re in your 50’s, 40’s or even 20’s can help ensure you retire down the road with enough funds to support you through retirement without financial burden on your children.
TFSA refers to a Tax-Free Savings Account.
As the name implies, it's a flexible, tax-free savings account ideal for a down payment for purchasing real estate. In a TFSA, you can save up to the annual limit for the year ($6,000 for 2022).
You can generally withdraw any amount from the TFSA at any time and recontribute it for the following year.
The whole point of the TFSA is to earn interest: the tax-free compounding interest allows you to build medium to long-term wealth.
Here’s a jarring figure: the average cost for one year of undergraduate tuition is $6,580 in 2021. By 2022, post-secondary average tuition rose up to $7,472 and is still increasing. And these amounts do not include other education-related expenses such as books or housing. RESP is the best way to secure your children's future. (You can also open an RESP for yourself if you think you may go back to school in the future.)
How much can you invest into an RESP? You can contribute up to a lifetime maximum of $50,000 and the account can stay open for up to 36 years. And one of the best things about RESP is that just like a TFSA or RRSP, it generates interest!
You can choose where to invest your savings or choose a plan that invests money for you: stocks, bonds, GIC, mutual funds offer you a wide range of investment options.
Depending on the plan you chose, the government could match 20% of the RESP contributions you make up to $500 per year per beneficiary.
Having a disability doesn’t mean you can’t create long-term savings. However, without proactive planning, a disability or critical illness can represent a financial burden for your family as you age. The Canadian government created this savings account to support Canadians with disabilities, critical illness and other severe health issues.
However, you can only contribute up to the age of 59. You must also be already eligible for the disability tax credit, meaning you must have an impairment in physical or mental functions that are severe and prolonged.
Among all the things you should have in your family financial plan, life insurance is a must-have for protecting your loved ones. Your beneficiaries will receive a death benefit to pay any debt you left, keep the family house, or even cover remaining medical bills, or some simply use it to maintain their standard of life.
Life insurance coverage can be permanent or temporary. At Termlite, we believe that term life insurance (temporary coverage) can be the best product for the family finances as well as the most affordable.
Due to its low premiums, term life insurance is easier to include in the family budget as it is a cheaper solution and can be eventually converted into a permanent plan if you want the option in the future.
Term life insurance plan can also be used in lieu of mortgage insurance if you plan to invest in real estate. It has more advantages than the average mortgage insurance plan offered by your bank:
One last piece of parting advice: estate planning is an often-overlooked part of holistic financial planning.
To avoid complications and headaches for your loved ones, be proactive about your estate plan and prepare your last will with an attorney so that your succession is smooth for your heirs.
The loss of a loved one should be dedicated to grieving; not struggling with unexpected debt or dealing with complicated financial details.
We hope this guide about family financial planning has helped you get a clear family's financial plan. If you have any questions or wish to receive a quote for a life insurance plan, our licensed insurance advisors are ready to work with you to create a tailored insurance plan for your future.
Written by Diane Taes