Our clients Karen and Greg* are married with two young children aged six and eight years. They both earn good salaries and receive the monthly children’s allowance. Often times, they have no savings left at the end of the month, even though they know they should have excess funds in their bank account. They have decided it is time to consider proactive savings options for their children’s future. But how much should they set aside?
In Module 1, we learned about the four principles of investing, one of which focused on investment goals. Before you start investing, it’s important to know your why. It will help you to define your goal and motivate you to keep investing. For Karen and Greg, it’s their children. Planning your children’s future is important – and whether that’s saving for their education or a deposit for their first home, you want to give them the best chance at success. And so, Karen and Greg have decided to set aside a minimum amount for their children’s future that was previously being absorbed into the family’s day-to-day expenditure.
Questions to think about
When you’re thinking about your family’s future, there’s a lot to consider. So, before we delve into a savings plan, we encourage you to consider the following:
-How do you want to use your wealth? By that, we mean how much do you want to spend, save, grow, or give?
-How can you protect your family, and safeguard your children’s future? What if something happens to you?
-What is your intent for your wealth for your children? For example, education, or a deposit for a house.
-What’s the minimum that you need to set aside for your children? And when should it be passed on to them?
-How can you pass on your values relating to wealth to your children?
Investing in your family’s future
There are plenty of suitable investment products for people in Karen and Greg’s situation. After completing a financial review, we agreed that Karen and Greg would like to save €400 every month – a portion of their income along with the monthly children’s allowance – into a diversified savings product.
Most people do not save the children’s allowance from day one – but practically speaking, if you save it for ten years at an average of 5% returns, it will generate a pot for your intended goal of over €60,000 – that’s not insignificant when you consider funding the average Irish undergraduate degree costs €40,000.
By establishing a savings plan, Karen and Greg now have the comfort in knowing that there are structures in place for their children’s future education.
Of course, when it comes to savings plans, we are often asked by clients: what is the minimum amount one should consider for regular savings? And while Karen and Greg decided to save €400 per month, we often have clients who set up savings plans for as little as €150 per month. Whatever the amount, savings will grow over time – it’s an easy goal to prioritise.
Another consideration is protecting the family’s financial stability should Karen or Greg lose their income on a temporary or a permanent basis. We find that most households are not in a position to sustain their current lifestyle with a loss of salary for more than three months – and this held true for Karen and Greg too.
Karen is highly skilled and highly paid, but her remuneration does not include any other additional benefits. So, we advised her to direct some of her salary towards an income protection policy. Karen opted to protect herself to the maximum allowable (less any state benefit) of €100,000, or 75% of her salary – and the cost of doing so was approximately €200 per month (or €2,400 per year). Income protection plans can qualify for income tax relief at an individual’s marginal rate and therefore, in Karen’s case, this reduced down her monthly premium on a net basis to €120 per month, or €1,440 per year.
During our review of Greg and Karen’s protection policies, we identified a gap in Karen’s life cover. While they had existing mortgage protection, and Greg had life cover through his employment package, Karen had no additional cover. That meant the family would be left short should anything happen to Karen. We advised it would be in the couple’s best interests to put in place life cover for Karen, to the sum of €500,000. Should Karen pass away, the policy would pay out a lump sum of €500,000 to the family – and the cost is approximately €70 per month, or €840 per year.
So, as you can see, Karen and Greg set their investment goals and put protection in plan to safeguard their children’s future.
*Names have been changed.