December 03, 2010 | Posted in Family Finances | Post a comment | Share Article |
by ECS Solution
As parents, our main priority in life is our children. We work hard day and night to provide the best that the world has to offer to our children: nutritious food, the best school, the latest toys and gadgets, enjoyable holidays and so forth.
In our minds, we want to provide our children with the best of everything, or at least better than what we ourselves received during our childhood. But in trying to do so, we must not forget the importance of being financially savvy and wise to face tomorrow’s uncertainties.
Starting early in your family’s financial planning is always a worthwhile endeavour. It helps families to be realistic in managing their financial matters. Financial planning is a tool that looks into the short and long term requirements of the family’s finances. In fact, a good financial plan is akin to a financial guardian that protects your child’s interest.
Basic protection will always come first
The topic of family financial planning is very broad. We shall focus on one of the components, that is, the importance of our children’s benefits in the current and future years.
It is crucial for families to cover themselves from the risks they may face throughout life. This applies especially to children as they tend to be more easily affected by illness and accidents due to their vulnerable nature. Ideally, the first financial product to consider is medical and personal accident coverage for your children.
Power of compounding – Generating earnings from previous earnings
Besides basic protection, we should also look into financial uncertainties in the form of inflation – our main adversary. For our children, inflation means a rise in the cost of living, which can hinder them from enjoying the standard of living they deserve, for example good meals, good medical benefits and good education.
Despite striving to work hard in the hope of a better pay cheque, we will always have to contend with inflation. The good news is that we have many opportunities and avenues to invest in, and we can apply the power of compounding to curb inflation.
However, investments typically require rigorous analysis and keen commitment, and this may involve a significant amount of time and knowledge.
Protection for family income is vital
The next area we will ponder on relates to “what if” situations. “What if” we are not around tomorrow; how can this plan continue? What if our children were to inherit a huge sum of money; how would they live with the inheritance money? This is a constant headache among parents.
We cannot leave the “what if” question unanswered. Good planning must also protect the breadwinners to cover their dependents’ basic needs. This may not be a simple solution as each family has to factor in the inflation rate in their current household expenses up to the last dependent.
Using “trust” to administer your children’s fund
Children with special needs and children who have inherited a huge sum of money at a tender age have unique requirements that need to be provided for. The creation of a Living Trust using life insurance as the funding mechanism can be used to protect their needs. In the setting up a Trust for a special needs child, it is always best to seek the advice of professionals to ensure that the Trust created is valid and practical.
Planning requires knowledge
The danger starts when we think that our family’s financial plan is well taken care of simply by relying on a single or a few financial products without a clear understanding about them. The fact is that every family and every child is unique, and the product alone can be misleading and may not be able to meet your objectives when the time comes.
A good family financial plan must begin with the right understanding of our background. We need to be honest with ourselves about our current financial standards and our limitations. We need to prioritise our family needs before our desires. The need must be well incorporated and considered into the financial plan.
It is always very important for every family to always review their financial plan due to the change in circumstances around us. The investment needs to be consistently monitored because our financial landscape keeps on changing. The cost of our ignorance is very severe. Not to forget, knowledge is crucial for effective financial planning, and it is important to seek advice from the professionals.
Important protection in your planning
ü Protect the child from daily risks with medical and personal accident covers.
ü Protect the breadwinner from the risks to his life, so that his family can maintain the quality of life in case of an unfortunate eventuality.
ü Protection also means protecting family assets and making sure our children will fully benefit from it.
ü A ‘Trust’ is a way to protect your asset for your children’s interest.
ü A ‘Trustee’ is a person or a corporation who will administer the trusted asset. They will be governed by the trust deed.
Children financial planning for education
ü Plan where you want to send your child to further their studies.
ü Find out the current costs and also consider the living costs especially if you plan to send them abroad.
ü Do take note of the inflation effect on future education costs.
ü Also consider the currency exchange effect if you plan to send them abroad.
ü Assess your current financial position and limitations and match it with your plan.
ü Take advantage of the time value of money and the power of compounding by investing early.
ü Strategise your investment with the right product, diversification and monitoring.
ü Protect your education investment plan with insurance and trust.
ECS Solution is a financial and business advisory firm which offers financial planning services and specialises in investment portfolio management. The company is licensed with the Securities Commission. To know more about investing for family planning, contact us at info@ecssolution.com or visit www.ecssolution.com
