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Financial planning for busy moms.

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The editors of mommy247 recently contacted me (a boring financial guy who doesn’t really understand the fairer sex all that well and who doesn’t have any kids himself) to write a blog to the moms about saving and financial planning with special reference to your little ones.  This should go swimmingly :)
The mere name of the blog (mommys247) sounds exhausting and from what I do know of your lives it is pretty hectic…so I will try and keep this short and sweet.
Financial planning is not some mystical thing that only rich people do.  It is essential that you as a mommy and/or wife and own person understand the importance of it, not only in your children’s lives but your own too.

The question was put to me what should you do in the phase before you even start planning to have children and then what should you do once the little one is there?

Let me start off by saying this:  I might not have a child but I know about fertility treatment and I know how much it can cost and what pressure this can put on a relationship that is already stressful due to the copious amounts of hormones that are being put into your body.  The first thing you can therefore do when you even think about having kids is to start saving for that child, either to BRING him or her into the world (via having to pay for fertility treatment) and/or SENDING him or her into the world by paying for their education.  It is impossible for me to give you guidelines about how much and how early you must start to save because every person’s situation is different but do the following:
1) Start a separate fund from any other savings you might do
2) name it your baby fund and
3) choose the appropriate product. 

With appropriate product I mean something that is not contractual (like a policy) but where you can stop, start, withdraw or add without any issues.  A unit trust investment (minimum of R500pm) in a Balanced fund with someone like Allan gray, Investec  or Coronation will do the trick.

If you are lucky enough not to have had to raid this fund to help with bambino’s creation the next challenge will be to not go all out with the buying of the baby stuff!!  Not buying the brightest and best (especially for the first born) is probably hard.  I can imagine that you want to…but in the words of Benjamin Franklin  "The eyes of other people are the eyes that ruin us. If all but myself were blind, I should want neither fine clothes, fine houses, nor fine furniture.   

This probably applies to baby stuff too right?  Does little Johnny or Sarah really care if their clothes were made a fruit or if their pram is a Ferrari?  The choices you make here will have a profound impact later on though.  To illustrate what I mean and the incredible force of compounding I just want to illustrate two different outcomes from two different couples.  Please accept that I oversimplified the example for illustration purposes.
Sarah and John Jones are a regular couple.  When their child were born they bought the best of everything costing them around R20 000 (I’m probably being optimistic right?).  On the first birthday they spent a lot of money on a baby party (which none of them will ever remember) and each year they gave expensive gifts to their precious child.  When little Johnny turned 13 and started high school the next year the Jones’s suddenly realised that they have not made any provision for little Johnny’s tertiary education. 

They went to see a financial planner who told them that the average cost for a student at Stellenbosch (if not residing at home) is in the region of R100 000 per year or R300 000 for ‘n regular 3 year course.  This is in present value terms though and if we assume education inflation stays around 8% this would mean an amount of R440 798 in 5 years time when Johnny matriculate.  In order to save that from a standing start the Jones’s would have to start saving an amount of R5 397pm (assumption of 12% growth) to save enough money in the coming 5 years!

Their neighbours Mark and Bettie Frugal’s daughter Kate was born in the same year as Johnny.  She didn’t get the nice stuff Johnny got and had to do with R5 000 worth of second hand stuff (that she coincidentally never noticed), her parents didn’t spend a lot of money on lavish parties or gifts but invested the R15 000 (R20 000 – R5 000) and started saving R500pm from the first month she was born in a Unit trust investment at one of the companies mentioned above.  They had an appointment with the same financial adviser the day after the Jones’s and got the same frightening news about the cost of education amounting to R440 798.  The difference here though were that little Kate’s  unit trust fund were already sitting at R256 936 and her parents only had to save R318 pm from thereon to make their target.

Can you see how these two kid’s future will probably look completely different for more than one reason.  Johnny would have been taught nothing about money while thinking that to have nice things in life does not come at a price.  If he’s lucky he’s parents will have the money to save and still send him to varsity without a loan but if he’s not he might end up having to go work without getting a further education or end up with study debt that will take him years after studying to repay, putting him further behind Kate who will be able to start saving for her retirement straight after she lands her first job.

Please do yourself and your child a favour and start saving EARLY and in the right products.  You will do yourself a big favour in return.

If there is any questions please feel free to ask.  I will answer as soon as possible.
Happy investing and get some sleep!!

andro@proverte.co.za