How to get your finances on track
Work out where your money goes by keeping a log for a month, write down each expense and what it's for.
Divide expenses into:
- Fixed expenses such as insurance, home loan or rent payments,
- Other essential costs that vary from month to month such as petrol, phone bill or grocery expenses, and
- Variable expenses, such as your weekly movie date or dining out.
Once you know where your money goes, you can look at each cost and see if you could make a saving.
As you prepare for your baby, use the time to pay off your credit card, but first make sure you have the right card for your needs. You can make big savings by switching to a card with a lower interest rate.
Many home loans offer you the chance to make lower or no repayments for six or 12 months while you're on parental leave – ask your lender if you have this option.
Conditions usually apply: you may have to make repayments of at least 50% of your salary, have a job to return to after your parental leave and have already held your home loan for a period such as 12 months and repaid part of it (for example you may not be able to owe more than 90% of the value of your home).
Interest is still added to the loan during this period. It makes sense to repay your home loan as quickly as possible, as the quicker you repay it the less you pay in interest.
If you're pregnant, it may also be a good time to think about fixing the interest rate for all or part of your home loan – a fixed rate gives you security and allows you to budget.
You may end up paying a higher rate than variable rate borrowers, especially if you lock in rates when they're at their peak.
Direct your savings into a fund for baby costs that you can draw on for all your extra expenses. If you have a mortgage with a redraw facility, consider using it to store some funds.
Otherwise, use a high-interest online savings account. You could even practice living on one salary while you still have two, and pay the second one into your savings.
Saving to pay for your baby's education is similar to any other long-term savings goal. It can be as simple as putting a few dollars a week into a high-interest savings account or as complex as developing a portfolio of shares.
Your long-term saving options
- Investing in a high-interest savings account, shares or managed fund is one option for saving for your child's education. Generally, it's not the most tax-effective strategy, but may offer flexibility and investment choice.
- Education-specific managed investments are tax effective. Carefully read each company's product disclosure statement before investing and check if they're flexible enough for your needs. For example, what happens if your child decides not to take up tertiary studies? Can you get the money out?
- Paying back the mortgage to 'save' for your children's education can be an excellent strategy – it's tax-effective and available to pretty much all home owners, but you need to be very disciplined, stick to your savings plan and make sure you don't use the money for other things.
Paid Parental Leave
The Paid Parental Leave (PPL) scheme is an entitlement for working parents of children born or adopted from 1 January 2011. Parents get up to 18 weeks of government-funded PPL at the rate of the National Minimum Wage ($622.10 a week before tax at 1 July 2013).
In contrast to the Baby Bonus, which is tax-free, PPL is considered taxable income and has bearing on Family Assistance and Social Security payments.
To be eligible for PPL you can't be working during the time it is paid and must have had a personal income of no more than $150,000 in the financial year before your baby is born. You must also have worked for at least 10 of the 13 months prior to the birth or adoption of your child, and worked for at least 330 hours in that 10-month period (just over one day a week) with no more than an eight-week gap between two consecutive working days.
Baby Bonus & Family Tax Benefit
If you're not eligible for PPL, you can receive the Baby Bonus, which is paid to families after the birth or adoption of a baby before 1 March 2013.
Since 1 March 2014, the baby bonus has been replaced with an increase of Family Tax Benefit Part A (FTB Part A) payments by $2000, to be paid in the year following the birth or adoption of a first child or each child in multiple births, and $1000 for second or subsequent children.
The additional FTB Part A will be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly installments.
The Coalition's Paid Parental Leave policy
Under an election promise by Prime Minister Tony Abbott, mothers could receive their normal salary (up to $50,000 – that is, half of their annual salary as long as it is $100,000 per annum or lower) for 26 weeks, plus super. There is currently no confirmed start date for the scheme – it is yet to pass both Houses of Parliament, and whether the scheme will come into effect by its proposed start date of 1 July 2015 is currently in doubt.
One of the first things you should do when you're planning a family is review your health insurance; it's actually best to do this before you're pregnant, as waiting times of 9 to 12 months apply before you would be covered for a full-term birth.
If you already have private hospital insurance:
- Talk to your fund and find out your level of cover for obstetrics. Can you go to a private hospital? Can you go to a public hospital as a private patient?
- Review your excess and co-payments and consider upgrading to a policy without an excess. However, keep in mind the 12-month waiting period for pre-existing conditions that applies if you upgrade to a higher level of cover, even if you stay with the same fund.
- Check with your fund how soon you need to upgrade to family cover (couple and family cover is usually the same price so it won't cost you more) to make sure that your baby is covered.
If you receive treatment as a private patient, your private hospital insurance will not always cover the full cost. You may be charged a gap: the difference between the hospital and/or doctor's bill after you receive your Medicare and health fund benefits.
How to minimise gap costs
- Ask your doctor if he/she has gap cover arrangements with your fund and if you will have to pay any out-of-pocket costs. Get this information in writing.
- Ask your doctor if you will be billed by other doctors who may treat you, such as an anaesthetist or surgeon's assistant, and how you can get an estimate of their fees.
- Ask the hospital if it has a current agreement with your fund and if there will be any out-of-pocket costs.
- Confirm any information you get from the hospital and doctor with your fund.
Life insurance covers your dependents if you die. As a rule of thumb, the sum insured should be 10 times your salary. However, you may need more depending on your individual circumstances – consider how much you owe, how many children you have, and their ages.
You'll also need cover if you have a loan such as a home or personal loan. Whenever your family situation changes, you should review your life insurance.
Income protection insurance pays up to 75% of your salary if you cannot work because of illness. Premiums vary depending on your risk factors, the waiting period until the benefit kicks in and the duration of cover.
For example, an income protection insurance policy with a 30-day waiting period for a 30-year-old male (non-smoker) office worker with a benefit of $6259 per month (75% of a $100,000 salary) for a period of two years could cost on average about $275 per year (with your industry super fund) or $465 per year (as a standalone policy through your financial adviser). Premiums for income protection insurance are tax deductible.
If you're not employed because you're looking after your kids, you usually can't take out income protection insurance. Consider trauma insurance instead, which pays a lump sum in case you suffer one of a number of conditions, such as cancer, stroke or heart disease.
Total and permanent disability insurance pays a lump sum if you become permanently disabled because of an accident or an illness such as a stroke. You can be insured against either not being able to do your specific type of work, or any work generally.
Shopping for baby
Over the first four years of your baby's life, you could spend more than $20,000 on baby purchases, with the bulk of the cost in the first 12 months.
Average spent per year for the first four years:
*Source: IBISWorld 2009
- Furniture – $539
- Clothing – $1,564
- Nappies – $1,381
- Footwear – $35
- Nutrition and food – $863
- Toys – $378
- Other – $534
- Total – $5,393
- Wait and see what you need. It's wise to buy a few essentials and then spend carefully as the need arises.
- Make a wish list for friends and relatives. Try to think ahead so you will know what to suggest when someone asks what to give you for a present.
- Avoid buying expensive things your baby will soon outgrow, such as size 0000 clothes or a pricey bassinet.
- Don't underestimate the value of easy-care items – ideally, you want to be able to just throw clothes, blankets and so on in the washing machine and perhaps the dryer.
- Think about renting or borrowing some items – for example, many libraries offer toys and children's books, and some councils and community organisations provide baby car capsules for hire.
- Shop around. Your phone and the internet are convenient for comparison shopping, as long as you know the brand and model names of the products you're looking for. Department stores have regular sales, so with a bit of planning you can take advantage of them to save money.
- You can save a lot of money on second-hand items such as children's clothes and toys which might have had very little wear. There are some products you shouldn't buy second-hand , like car restraints, which you can't be sure haven't already been in an accident. With other products such as cots, make sure they meet current safety standards – even some brand new cots don't meet the safety standards, as we found when we tested them.