One of the many advantages of building a successful career is the opportunity it provides to create a better life for the people you care most about. For many of us, helping the children is an important goal — both financially and emotionally.
But as we discussed in a previous article, helping your family financially and looking after your own finances are not mutually exclusive. Often the best way to ensure you can give your children the opportunities you want — whether that involves private schools, university, helping out with the first home or other goals they may have — is to ensure your own finances are in top shape.“Minimising tax on any savings or investments is an important issue …”
The key is flexibility. Having your own finances in order gives you options to help your family as and when they need it rather than locking into a fixed financial commitment now.
While there are products on the market that claim to make saving for education simple, they are generally complicated and incur fees. There is certainly psychological appeal in being able to see a pile of money set aside for the kids but, in reality, most people would be better paying down their mortgage so that they have more disposable income on hand when the money is needed.
You may be able to fund those private school fees by redrawing those extra mortgage repayments you’ve made on your home loan, or withdrawing them from a mortgage offset account. In the meantime, your money is safe, it is reducing the interest on your home loan, and you are not paying tax on interest or investment earnings.
If you’ve already paid off the mortgage, there is more scope to set up a savings or investment plan. But any investments should be done on their own merits — taking into account things like risk, likely returns, fees and the timeframe involved — rather than opting for a special-purpose product.
Minimising tax on any savings or investments is an important issue and some products, such as insurance bonds, claim to be tax-effective as they are taxed internally, rather than in your hands. However, you may be able to obtain a better after-tax result by investing in something more flexible or investing in a lower-earning adult family member’s name.
For older parents, making extra contributions to superannuation may be another option. Assuming you can access the funds when you need them, boosting your super balance now can be a tax-effective way to fund goals other than retirement.
But tax alone should never be the reason for making an investment.
Another key component in ensuring you’re able to help your children is to make sure your insurance cover is adequate. Even the best-laid plans can come awry if the primary earner is unable to work , or dies, without appropriate insurance. Similarly, it is never too early to have a will and enduring power of attorney made up.
Putting together a financial plan can help balance your short-term financial commitments with your longer-term financial goals so that you’re prepared and able to help your children in the future.
While it will involve a cost, a financial planner can provide an holistic approach to structuring your finances so that you meet your own goals and have the flexibility to help out the family when you need to.
It is important to understand how one goal impacts on your broader financial position and other goals you may have. You may need to make compromises, such as deferring that career change or investment property purchase. But by drawing up a longer-term plan for your financial future, you can ensure you have the flexibility to help out with your children’s needs when they arise and achieve your own goals as well.