Ensuring a healthy budget is key to your family's future, but how deeply have you thought about your how your family finances can be improved?
Given that Scott Pape's The Barefoot Investor has been Australia's best-selling book (fiction and non-fiction) for the past few years, it is little surprise that his new book, The Barefoot Investor for families, has been high in the best-seller list.
Nielsen BookScan reports that The Barefoot Investor for families was the fifth best-seller in Australia for 2018 despite only being released in the lead-up months to Christmas. And Pape's book for families broke the first-week sales record for a non-fiction book in print.
The rapid success of a personal finance book for families suggests a growing recognition that family finances really matter.
How deeply have you thought about your family's finances and about how those finances can be improved? This is particularly pertinent in a time of high home prices (as adult children try to buy their first homes), high debt (Australian household debt is at a record high) and continuing medium-to-long-term expectations* for subdued returns from diversified portfolios.
Here are just a few things to think about regarding family finances:
Financial education for children – and their parents
One of the best gifts that parents can give their children is to teach them from a young age at least the basics of saving while minimising unnecessary spending. And encouraging voluntary super contributions from the time of first joining the workforce is a great boost to long-term financial wellbeing.
And parents themselves can never stop learning and teaching each other about such fundamentals of sound investing and saving practices as the benefits of compounding returns, appropriately-diversified portfolios and setting achievable goals.
Bank of mum and dad – take care
More than two years ago, Treasury secretary John Fraser spoke of his concerns for the retirement savings of parents who help their adult children into housing by making withdrawals from "the bank of mum and dad". His words of caution brought more attention to a sometimes-overlooked personal finance issue.
Fraser is worried that by helping their children into housing, as homebuyers or tenants, parents may limit their own abilities to save for retirement given their circumstances.
Since Fraser's warning, the number of first homebuyers has markedly risen, spurred by a fall in housing prices, led by Sydney and Melbourne, and low interest rates. Perhaps paradoxically, these factors may well increase rather than lessen the number of applications to the bank of mum and dad.
A practical approach for parents is to realistically assess the adequacy of their retirement savings and overall financial position before lending to adult children for first homes.
The sandwich generation – caught in the middle
Are you a member of the "sandwich generation"? This is the generation that is "sandwiched" between the needs of their adult children (who may be still living at home) and their ageing parents.
Typically, members of the sandwich generation face saving for their own retirement while trying to provide for the emotional and often financial needs of their adult children and increasingly-frail parents.
While those in the sandwich generation try to help their grown children and ageing parents, it's crucial that they don't neglect their own needs – including paying off their own debts and saving for retirement. This concern is often associated with the bank of mum and dad.
Practical ways to assist ageing parents include ensuring that they are receiving their government entitlements, offering to help them budget efficiently and helping them to obtain suitable accommodation given their age and health. And you can try to protect them from fraudsters who target the elderly.
Again, one of the best ways that parents can help their children from a young age into adulthood is to encourage good budgeting and savings habits.
Spouse finances – a harmonised approach
Spouses have clear motivations to at least consider the potential benefits of taking a co-ordinated approach to savings and investing – as well as in dealing with their day-to-day budgeting.
Whether a joint approach to money works in the interest of both spouses much depends, of course, on personal circumstances.
Spouses with an uncoordinated approach may be unintentionally pulling in different directions. They may not be making the most of opportunities to save and invest, and perhaps have no realistic impression of how far their savings will last in retirement.
Discuss making a list of at least the fundamental ways that you and your spouse can harmonise your finances and then perhaps discuss the list with an adviser.
Your list may include: budgeting together, setting shared long-term goals, co-ordinating investment and saving strategies to achieve those goals, and setting appropriate asset allocations and diversification for portfolios held jointly and individually.
Other critical matters to add to your list include: deciding whether your family has enough life, disability, income-protection and medical insurance; minimising investment costs that handicap investment success; and co-ordinating estate planning.
Superannuation contribution caps and the introduction of the $1.6 million superannuation pension transfer cap provide a further incentive for a couple to combine and co-ordinate their savings efforts.
*Vanguard 2019 economic and market outlook: Down but not out