Connect with us

Family Planning

Financial Planning For Your Child: It Starts With You

Your desire to provide the best opportunities for your children should not come at the expense of your own financial security.

 

Giving your kids the best head start in life is something that most parents would strive to do. As far as we can afford, we hope to give our children the best. We seek out the best schools (even though MOE tells us every school is a good school), enrichment classes and maybe even expensive overseas education.

Sometimes, we even provide for these things at the expense of our own financial security.

Does It Make Sense To Spend Too Much On Your Children?

There is a saying that goes, “you can’t take care of others unless you take care of yourself first”. This is a statement that many parents, or future parents, should remember.

In a previous article that we wrote, we estimated that the cost of having a child could easily range from $79,000 (at the very least) to $192,000 or more. This excludes the cost of paying for university education, and any holiday trips.

Read Also: The Cost Of Raising A Child In Singapore

The fine balance we need to strike as responsible parents is support our children even as we ensure that our financial future is not being compromised.

What Does It Mean To Take Care Of Our Own Financial Future?

Taking care of our own financial future would generally include the following:

#1 Building up a stream of passive income. This could include, payouts from CPF Life, annuity plans, income from investments such as bonds and stocks, rental income from properties.

#2 Clearing all financial obligations that you have (e.g. property loans, car loans), or ensuring that you have sufficient passive income to cover these loans, and also your basic living expenses.

#3 Having health insurance policies in place to hedge yourself against the possibility of any illness depleting our savings.  

There could be more, depending on each individual. Some may want to indulge in activities such as frequent holidays, golf trips or other hobbies that will require more money.

What Happens When We Don’t Take Care Of Our Own Financial Future?

If we fail to take care of our own financial future, then the expectation would be passed on to our children to provide for the shortfall in our needs.

Think about it for a moment. None of us know the financial challenges that the next generation would encounter. Our current expectations are still based on the logic that if we study and work hard, we should be able to find a decent paying job in Singapore.

Financial Planning For Your Child: It Starts With You

Yet that logic has proven to be flawed in many other developed nations in the world.

Across The European Union, countries such as Greece (27.6%) and Spain (21.6%) are seeing a huge number of unemployed, tertiary educated individuals.

More frightening however, is the statistics that shows their youth unemployment rate, which is close to 50% for these two countries.

Even among developed economics that are doing okay today, the statistics we see are not promising.

Countries Unemployment Rate (Tertiary) Unemployment Rate (Youths)
United States 7.2% 11.6%
South Korea 3.3% 10.5%
Australia 4.6% 13.1%
United Kingdom 3.9% 14.6%
France Not Available 24.7%

 

Source: OECD (2016)

There is a very good chance that future generation may face much more challenging job circumstances than us today.

Their cost of living will be higher, and there is no guarantee that their income would rise in tandem. Our children will have to bear with the higher cost of living, and have their own children to care for as well, while coping with possibly more challenges.

The question then is, would our children be able to financially afford to care for us, and our shortfall in retirement, without jeopardising their own financial future?

It seems cruel to suggest, that children; after all they have been given by their parents, should care for themselves and their family first, before thinking of how much they can spare for their parents. We agree it is.

Yet, the hard truth is that the first 10 years of someone’s working life is usually the most important in determining the person’s future. Both from a career standpoint, and from a financial planning perspective. Here is an example of how it could easily play out.

Person A. Let’s call her Amanda. Amanda gives $1,000 a month to her parents to care for their needs over the next 15 years.

Person B. Let’s call her Beth. Beth also has $1,000 a month. Her parent doesn’t need her to give them as they have enough passive income for their retirement. Instead, she invests the money and earns a return of 6% per annum for the next 15 years.

After 15 years…

Amanda Beth
Portfolio $0 $279,000

 

After 15 years, Beth can choose not to invest each month and just let her portfolio continue to grow for another 20 years. At the end of her 35-year career, she would have accumulated a portfolio of $895,000 (6% return per annum).

All because she did not need to support her parents for $1,000 a month for the first 15-year of her career.

Before anyone accuse us of having a lack of filial piety, let us reiterate our position:

# 1 We believe every working adult has a financial responsibility to take care of themselves, and their financial future.

# 2 Taking care of our children, is definitely our responsibility.

# 3 If we have future needs after retirement, we believe our children should be responsible for them as well. It’s the natural way of life. These needs could be financial support, but also include other aspects such as emotional and physical support

# 4 If we have financial needs after retirement, our children would be the one who will be paying for it.

# 5 As such, the ideal outcome would be to take care of our own financial future, so that we do not need to rely on our children to provide for us.   

By that logic, taking care of our own financial future, and not requiring our children support, would directly benefit our children and their own financial security.

Read Also: Why Financial Planning Is A Young Man’s Game

At the end of the day, everyone is in control of their own money. If you intend to spend $200,000 on your kids’ overseas education, and have saved up well over the years to do so, by all means go ahead and use it.

That said, your desire to provide the best opportunities for your children should not come at the expense of your own financial security. You should not be borrowing money to pay for your children expensive education, and put your financial future in jeopardy

Otherwise, it is your children, whom you have spent so much money on, who will ultimately be the one affected by the absence of your financial security.

 

DollarsAndSense.sg is a website that aims to provide interesting, bite-sized financial articles which are relevant to the average Singaporean. Subscribe to our free e-newsletter to receive exclusive content not available on our website. Follow us as well on Instagram @DNSsingapore to get your daily dose of finance knowledge through photos.