Parenthood is one of life’s greatest gifts, and with it comes great responsibility! Beyond providing the basic needs of keeping your child fed, clean and physically safe, parents need to take the necessary steps to ensure they can financially support their children from birth through to adulthood.
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Financial Planning
Raising a family in the Cayman Islands is expensive, but what an amazing environment to raise your family! The single largest expense, after your mortgage or rent, for most couples with a family will be school fees, unless your children are Caymanian and then they can go to one of the Government schools. This is why it's important to have a financial plan in place. According to a US Department of Agriculture report, it costs an average of US$286,000 to raise a child from birth until independence, excluding education expenses. While this figure can vary depending on specific needs, living arrangements and lifestyle, the truth remains that raising a child is a huge financial commitment. Planning for the future affords parents some peace of mind.
Determine Overall Financial Health
Parents-to-be would benefit from taking a bigger picture look at their financials once a year. Performing a financial ‘wellness check’ can help you stay on top of spending and increase your savings rate. Assess what steps can be taken to make the next year more productive and successful. Evaluate your housing situation, calculate your net worth, analyse your investment strategy, track your average monthly spending, and consider how these figures align with your financial goals.
Enlisting the help of a financial advisor from a specialist firm can give you a better understanding of your present financial position and help synthesise this information into a comprehensive and realistic plan of action. Scroll to ‘Make a Plan’ below for more details.
Identify Goals
Your priorities shift massively once you become a parent. Everyday expenses add up more quickly, while future investments, such as university and retirement, loom overhead. Taking the time to identify goals offers parents some much-needed financial direction.
Consider what you want to achieve for your family in the short term and long term and ask yourself some grounding questions: Are these goals feasible without having to spread yourself too thin? If not, are there spending changes that can be made in other areas to accommodate said goals? How do these goals presently line up against any fixed expenses? Have you allowed for your needs to take precedence over wants? All things considered, you can then prioritise your goals. As goals evolve, it's essential to keep them clear and focused to shape the future you desire.
Make a Plan
Armed with personal data and a list of aspirations, you can now formulate a workable financial plan for your family. This can be as simple or as complex as you wish, however, parents with an already overburdened schedule will likely respond better to a simplified approach. The 50/30/20 budget rule is popularly employed and for good reason: instead of dozens of line items, you can divide your money into three manageable buckets.
50% – Costs that Don’t Change
50% of your budget should go towards your fixed monthly costs. These include bills and any instances of debt, such as car loans, mortgage, insurance and pension payments. In short, these are payments which you can anticipate every month.
30% – Discretionary Money
Your discretionary money can be spent on your ‘wants’ (within reason). Think: life experiences, supporting charities, cinema tickets, family meals out, etc. Depending on your fixed costs and savings goals, the percentage of money allocated to discretionary expenses can be lowered; however, it is important to give yourself some freedom, if only to refresh good habits.
20% – Savings
This bucket focuses on the future and reflects your personal savings goals. However, building an emergency fund to keep your family afloat during periods of financial hardship should be a priority. Think: out-of-pocket health emergencies, major home and car maintenance, sudden unemployment or an unprecedented crisis such as the COVID-19 pandemic. The size of your emergency fund depends on several factors, but ideally, you will have the equivalent of 3-6 months’ worth of income set aside. Once an emergency fund is squared away, you can then save towards other goals, such as sending your child or children to university.
Wealth Planning
As your savings start to build, you will be able to use the money for things like making a deposit on a house for your family or beginning to contribute more to your pension, enabling you to be more financially secure in the future. Many banks and financial planners will be able to give you advice and guidance on how your savings can be put to work to generate additional income or capital to help you further your short-term and long-term goals.
Estate Planning
A good financial plan also considers what happens to your money after you pass away. New parents should update their will, trust and beneficiary designations as soon as their child is born to reflect changing wishes. For more information on wills and estate planning, see the article opposite.
Financial Toolkit
A financial toolkit can help actualise your financial plan and give you more control over your income. Included in your toolkit are your ‘spending tools’, which are your methods for making payments, and include cash, debit and credit. There are certain situations where one may work better than the other — however, people usually use a debit card as their default payment method.
Most banks on-Island offer the tools for you to manage your income in a way that reflects your financial plan. You can set up standing orders under different headings and set the amount and frequency so each month your income is automatically divided into fixed costs, discretionary costs, and savings. You can set up external standing orders for fixed monthly payments, including credit card bills, car payments, water, electricity, etc.
Financial Advisors and wealth management firms, such as Liberty Wealth, offer the tools for you to manage your savings and investments in a way that reflects your financial plan. While the onus is on the individual to determine their own financial needs, financial advisors can offer the planning and tools to provide customers with a clear understanding to secure their family’s financial future. Turn to page 208 for a list of Cayman's financial advisor firms.
Is Financial Freedom Possible?
Would you like to be free from the crushing pressure of debt? Do you want more financial stability and freedom? Are your finances causing significant stress in your life right now?
If so, there is hope. Dave Ramsey's '7 Baby Steps' is a money management plan designed to help you get out of debt, and then save money so that you can get to the point where you can start building wealth. Below is a summary adapted from his book, 'Baby Steps Millionaires: How Ordinary People Built Extraordinary Wealth and How You Can Too', that may be just what you need to help you achieve financial success.
- Save $1,000 for your starter emergency fund
- Clear all debt except for the mortgage starting with the smallest to largest
- Save 3 to 6 months of expenses for emergencies in a fully funded emergency fund
- Invest 15% of your income for retirement
- Save for your children’s college fund
- Pay off your house mortgage early
- Build wealth and give generously
