It’s one thing to get our finances together as an individual. You know you have to track expenses, save, pay credit card debts, and set goals for what you want to achieve in life. But what about family financial planning?
Apply that same mindset to the lives of your family. You need to consider the needs and wants of a partner, young children, or even adult children. After all, the nuclear family as we know it today no longer conforms to double-income households with 2.2 kids, pets, a car and a mortgage that includes the white picket fence.
Family finances have never been more complex. And while it’s important to factor in the things that make your family unique, there are money principles that hold true regardless of our family setups. When custom-tailored to work with your circumstances, these principles set you up for financial success and freedom.
This article will walk you through the principles of family financial planning while diving into the puzzle pieces that make a sound family financial plan.
A lot of the things you know about money, you likely learn in the context of your personal, individual finances.
But what’s relatively simple and straightforward about budgeting (in theory, not always in practice!) becomes complicated when you start adding people to the picture.
“It is a matter of complexity. In a larger household, there are many more individual financial transactions to make than for a single person,” says Barbara Knoblach, an Edmonton-based certified financial planner with Money Coaches Canada.
“Also, the individual members of a family have their own needs. There are often conflicting demands on the money, which do not tend to be as pronounced in individuals.”
“While an individual is able to apply their finances any way they see fit, this is not so easily possible if a budget has to be created for multiple members of a family.”
Essentially, family budgeting is expanding your financial viewpoint from the individual to the whole. It is managing income for the benefit of all involved – for those who are generating that income, and those who are dependent on that income.
Not sure where to start? Here’s what you need to consider when building out a family financial plan.
While the ‘I do me, you do you’ approach to money is fairly common among couples, it’s important to identify how this will play out in your family life, says Clement Chung, a Vancouver-based certified financial planner. “Is [money] going to be a joint effort, or an individual effort?”
Knoblach suggests that it’s important for both partners to be involved, as one person’s money management will affect every member of the family.
“While it is not impossible for me to be working with only one partner of a couple, the spouse is going to be affected by the new financial behaviour of their partner, so it is ideal to have both of them on board from the beginning. Even so if they – initially or permanently – want to keep most of their finances separate.”
Similarly, it’s just as important for partners to share the same starting and end points.
Nicholas Huiis a Markham-based Certified Financial Planner and founder of VAVE Financial Planning. He points out that striving toward different financial directions will create tension and difficulty.
“It's challenging if one person's like, I wanna retire early, and the other person's like, I want to buy this really nice house,” he says. “So you want to make sure you're on the same page, or at least have an understanding of where you want to go.”
This also goes for how finances will be managed. Will both income streams be combined? Or will all bills be split 50-50? How much will you save; what is your budget for discretionary spending?
“People are different, and you want to make sure you're on the same page as your partner or your spouse.”
Naturally, households without dependents will have a different approach to those without dependents.
“The standard child dependency period is about 20 years or 18 years. During the first 18 years of that child's life, they are absolutely dependent on the parents' ability to generate an income and to sustain them,” says Chung.
And because children are – surprise! – living, growing human beings, their sustenance will look different at each stage of life. There’s the preschool and childcare stage; the elementary and after-school hobbies season; the high school years; and then there’s the post-secondary education stage. Will one parent look after the kids or will childcare become a necessary expense? Will you fund your child’s university education, or will they work through school and supplement their tuition with loans?
On top of all that, you still have to feed them.
It’s also important to consider the possibility of housing a child past their dependency period. These days, it’s not uncommon for young adults in their 20’s to remain at home or come back. Will you be splitting household finances then?
Ultimately, family financial planning and budgeting comes down to “combining finances and creating a lifestyle that you wouldn’t generally have by yourself as a single-income individual,” says Chung. “What’s important here is understanding that there is a bit of dependency on each other’s income.”
Over time, your family will come to rely on the financial structure you build together. The money that comes in is important. Since it impacts the lives of several individuals, how that money is budgeted is even more crucial.
Now that you know the basics, here’s how to build a family budget.
When it comes to creating a budget for the family, it’s important to identify what you want to get out of it.
“Some people might want to travel a lot, while others want to retire early. Your goals may be that you want to buy a house, and some people want to pay for their kids' education. Everyone's goals are very personal to themselves,” says Hui. This is why it’s important not just to plan your finances, he says, but to plan your finances around those goals.
“The basis of all financial planning is your family goals.”
Find time to do this activity as a family. It can be as detailed and complex or as fun and simple as you want. The key is to identify where you want to go.
Once you’ve figured out your goals, the next thing you want to do is to understand where you are now. What’s in your accounts? Any debts you’re currently paying off? Also, what are your spending habits like?
Getting a full picture of this will help you chart a roadmap for where you want to go—and not only because it tells you how much more you need to save to achieve a specific goal. Doing this also helps you project what your finances will look like over time.
“Some people think about their expenses now as what they will be in the future, even though there might be some life changes,” says Hui.
“In different seasons of life, there are different types of expenses. Just because you can afford a mortgage now, doesn't mean you can afford it five years after you have a child and you go on maternity leave. So I think you have to spend a bit more time projecting [financially] into the future, in terms of future plans.”
Life insurance and disability insurance become especially important when individuals start having a family. Because your money impacts the lives of the people closest to you, you’ll want to be sure that when that money stops coming in – whether due to death or disability – they’ll still be protected.
“When you’re talking about depending on each other to support a household, what you need to do is consider the risk when one source of income is no longer available,” says Chung. “That’s the biggest, biggest, biggest risk to any family household.”
On a long-term, day-to-day level, it helps to keep family financial plans simple.
If you want to set check-ins and money goal-setting sessions on the first Friday of every month, set it and follow through and do it consistently. If mom is meant to oversee entertainment spending and dad is meant to oversee house chores and distribute weekly allowances, stick to the assigned role.
“Plan for certain things and how they’ll be done so that you’re not always reinventing things. Hopefully, it’s a system that helps avoid conflict,” says Hui, pointing out that money is often a stress point in a lot of relationships and marriages.
All three experts agree that communication is vital. “One of the most important things that people living in family units can do is to openly communicate about their finances,” says Knoblach. “This means having regular check-in meetings – ideally at predetermined scheduled times, like once a week or once a month – to communicate about how the money is being used, progress towards specific goals, and any new things that have come up that need to be incorporated into the financial plan.”
To maximize your financial potential, take advantage of money incentives and high-interest savings accounts. There are Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs), of course. If you have kids, get them a Registered Education Savings Plan (RESP). There’s also the Canadian Education Savings Grant (CESG). If you’re thinking of buying a home, look out for the First-Time Home Buyer’s Incentive and the RRSP Home Buyers’ Plan.
Creating a budget is one thing; building a healthy relationship to money within the family is another. Start your family budget with these tips!
Talking about money may be difficult, but more difficult is having a fallout because of money.
“People who fail to communicate openly with respect to their finances are the ones that tend to be conflicted with each other, and also tend to be the ones who are more stressed about their finances and are generally feeling more helpless,” says Knoblach.
“The number one reason that marriages fail are financial issues that are not being addressed on time, and at some point become unresolvable.”
Knoblach, who also works as a research scientist investigating a genetic disorder that afflicts young children, says it’s important for parents to know that the way they talk about money has a strong impact on their children.
“Kids learn how financial questions are addressed in their family. If finances are always a source of stress and conflict within a family, there is a significant chance that children will carry these types of behaviours into their own adulthood,” she says.
“On the other hand, if finances are openly discussed and parents take on a mentoring role to start teaching children at a young age, those children will be much better prepared to navigate financial questions in their own lives later on.”
Reframe the way you look at family financial planning. If you have children, gamify it by having them create financial goals (such as savings from allowances) and reward them for achieving those goals.
“It's important that financial planning isn't just a chore, but also as rewarding,” says Knoblach. Not only does this make family financial planning more fun, but it also encourages families to follow through on their goals.
“Once people are able to follow a financial plan for a while, they will be seeing positive results, such as more money in the account, a lower debt balance. At this point, there is a very good chance that the new financial habits will become self-perpetuating, as the behaviours have been rewarded and are therefore positively reinforced.”
Because our families, along with our family needs and goals, are all so unique, it doesn’t hurt to seek the help of a professional.
Get someone who can map out a plan for your cash flow, retirement, investment, taxes, insurance, and estate, says Hui. As a family, you want the various puzzle pieces of your finances to be cohesive.
”You might want something that's a little bit more customized to you because we all have different goals,” he says. “It’s important to find advice that touches on your unique circumstances.”
Seeking professional advice also benefits your relationships. “Many people exhibit self-sabotaging behaviours or conflicts with their partners that can best be addressed by a neutral third party,” says Knoblach.
“The financial planner is not a member of the clients’ household and therefore does not have a vested interest in how the available funds are going to be used, other than trying to improve the overall financial well-being of the clients.”
Suffice it to say, few things are as financially important as family financial planning. Not only are the specifics so dependent on your individual circumstances; they are incredibly high-stakes, too. What you do with your money no longer affects just you.
Getting started and putting together a family financial plan is not impossible. In fact, a lot of hard work involves inner-work and relational work. While it’s difficult, the effort will be worth it if it means attaining financial freedom and security for our families.
“Step up to the plate and take responsibility for your finances,” says Knoblach. “Next to your health, this is the one area of your life that affects you profoundly.”