5 ways families can protect their financial future (that don't include buying insurance)
Updated: Jul 29, 2019
Parenthood brings a whole new world of responsibilities, not least of which, financial. While insurances are important, they're not the 'catch all' for keeping our family's financial situation secure. Here are 5 ways you can protect your financial future that aren't about taking out more insurance.
A few years ago the government came out to say the age pension age was increasing from 65 to 70. There was public outcry that this was an unfair policy to the people who worked in physical occupations. How can a bricklayer be expected to continue this type of work until they’re 70?
The hard facts are when the age pension was set at 65, the average male life expectancy was 58, way back in 1909. Back then, if you lived 7 years past your life expectancy then you’d get a pension. Let’s not forget that back then there was no superannuation, to live you earned money. As the years went on, people started to live longer, by the 70’s people started to average about 12 years on the pension.
Fast forward 30-40 years and the pension, which was originally designed as a fall back option became a ‘right’. It became a part of retirement planning. It became expected that, regardless of people living longer, we would be funded by the public for another 30 years.
It’s easy to see that, to cover these ongoing costs, there are 3 possible outcomes:
1. Taxes on the future generations are increased - obviously a poor outcome for our children in what is likely to be a very competitive financial future.
2. The pension is watered down in comparison to living expenses. While many have already pointed out that it is already not a considerable amount of money, this could very easily become even less comparatively to what it can buy in the future.
3. The age pension simply does continue to increase the age of eligibility.
Those of us who are at an age where we have young children have a distinct advantage over those that are nearing the age of ‘retirement’ and seeing their goal posts changed. We have the advantage of seeing this coming.
With this foresight, we should be planning for what the future might hold. Just because, unlike a lot of other financial advisers, I’m not a big fan of younger people locking too much up in superannuation, despite the tax benefits, that doesn’t mean I don’t think you should be putting a ‘retirement years’ strategy in place.
Everyone should be thinking about how they will continue to up-skill themselves for the future, especially those who work in a physical occupation. Tradies in particular are in a ‘boom-time’ for the amount of money they can earn. Absolutely take full advantage of the income potential you have now, just make sure you're re-investing some back into yourself, so you’re prepared when it’s time to find something less physically demanding.
Buy a home for your children's future
As Australians, we love property. Rightly so, we’ve seen plenty of people make considerable money over the years investing in property. In a dash to be investors though, many people have also lost a considerable amount through poor property decisions.
I meet so many people that are determined to invest in property simply to ‘build wealth’. They want to quit their 9-5 and live on ‘passive income’. While there’s nothing particularly wrong with this approach (although it’s a lot harder than they make it look on The Block), it means there is not an emotional value attached to the investment. This causes a few problems:
People are more likely to make purchasing decisions based on poor advice. There’s many a property spruiker around that claim to have the secret to making money in property. Unfortunately, that secret is actually that they’re making $20-40,000 commission for selling a poor asset to people caught up in the idea of ‘building wealth’.
Building wealth with property takes a long time. Too many people think, because of how the market has been over the last 10 -15 years that they will continue to see huge growth. When things get harder, interest rates increase, property prices slump, income doesn’t increase when living expenses do, people often find ‘investing’ to difficult and the property is sold, along with any opportunity to have made money.
Suddenly, with the lure of a different lifestyle, people are willing to take on an incredible amount of risk, based on nothing more than a desire for the possible end result. This, coupled with the above two points has in fact caused just as many, if not more people to cause the exact opposite of what they were trying to achieve.
Perhaps if we change our way of thinking when investing, we can make better investment decisions we’re likely to stick to. Perhaps the answer is to start thinking of your investments as something you are doing for your children.
Instead of investing to ‘build wealth’ why not consider buying a home for your children. Then you start to think about where will be a good place to live for them, what they would require in a home, how can you protect the asset to make sure they get the benefit from it in 30, 40, 50 years from now.
You might find that you can’t afford to buy the property you’d be happy with them living in. The funny thing is, in a lot of instances, what makes a good investment is something a majority of people will be happy living in. Maybe you make longer term plans, do more research and not just get caught up with the idea of building wealth.
Arguably, the most important part of this strategy is the emotional responsibility it causes. When investing gets hard you're not just thinking about selling the investment property, you're thinking about selling your child’s home. There’s a much greater chance of you working through the tough times (and reaping in the rewards in the long term growth).
Rainy day fund
Life can throw us some curve balls. Sure, income protection has its place and is something I think everyone should have. It’s not a catch all though. I’ll give you a personal example. With our second child, my wife had serious complications at 30 weeks.
This had her out of work (both employed and being able to help around the house) and unable to do anything for another 6 weeks after birth. 3 weeks after our daughter was born, my financial services licensee closed down and I was unable to provide advice (read: make an income) until I had secured another one. It was a stressful time. None of this was covered by our insurance
Fortunately, between money we had saved and some equity we had ALREADY released in our property, we were able to make it through this difficult situation financially.
If you’re a homeowner and you have some equity in your property it can be a great idea to release some of it for a ‘rainy day’. This doesn’t mean you earmark this money for a new car or a jet ski because you ‘deserve it’. It means you have money available for emergencies. Money that can make a stressful situation just a little bit easier to deal with. The important thing here is planning - It’s most likely that you won’t be able to get the finance approved if you wait until an emergency comes up. It’s best to do it when the ‘sun is shining’.
Life insurance and income protection are there to help you financially after illness or injury occur. The financial planning ‘standard’ is to say you should have so much insurance that you can continue to have your same lifestyle if something was to happen. Here’s a big tip - Life could change substantially, regardless of how much insurance you have. The problem with all insurances are they’re not free.
I’m not suggesting you shouldn’t have them. I think the right cover is critically important, though I do believe many people would be better off thinking about how little they could get by with, as opposed to how much does their lifestyle need. But today’s blog is about what you can do that isn't insurance.
There are many insurance claims that could’ve been avoidable. While we might be living longer due to the marvels of modern medicine, more than occasionally, we focus on the cure more than the prevention.
Get to your Doctor regularly, make sure you’re on top of any issues that might arise early. Evaluate your lifestyle, are there things you can be doing that could keep you fit and healthy. What kind of examples can you be setting to lead your kids into a healthy life?
Teach them how to save
Our parents are our great teachers. This isn’t just with the good things. We learn the good and the bad habits early on. How we act with others, how we view the world, how we handle money.
If you start to educate your children early on the value of money management, saving for things that make them happy instead of just buying because it’s ‘in’ they will be far more likely to make good money decisions later in life. The great news is, by teaching them, you might just improve your own decisions along the way!