How to become Rich: Starting a family

If this is the first article that you're reading in the How to become Rich series then I encourage you to go back and read The Basics first.

Before starting this article I would like to recognise that not everyone wants to start a family. However this article is not only covering those who wish to have children and how to financially prepare for  their arrival and upbringing but is also relevant to people who wish to marry or cohabit. It aims to look at how cooperation between people and families can have large financial benefits. For those who are not interested in sharing a life with other people then I'm sure you will find some other articles in the series more relevant.

Cohabiting/ marriage

Some couples like to have a joint bank account. Some couples prefer to keep their finances separate. I am unsure as to what the optimum solution is (readers, feel free to express your opinions in the comments box below). What is clear is that whatever the set-up, make sure that the two of you are open and honest about your finances. The reason for this is threefold:

1. It demonstrates trust in the relationship and if you can't trust your partner then you should probably question the point of the relationship
2. It allows you to make large financial decisions such as the purchase of a property
3. You may be able to set up your finances such as tax more efficiently so that together you both benefit

Housing

Okay so here's the biggie! One obvious strategy for pairing up with someone else is beneficial in terms of raising a deposit and paying the monthly mortgage payments. 

Here's one idea on your first property. Instead of opting for the biggest house you can afford, or only putting a 10% deposit down, or extending the mortgage for as long as possible, why not try and be a little counter intuitive. Try to put down the biggest deposit possible. This may mean that you will have to purchase a smaller house/ flat than originally intended. This level of commitment to the purchase as well as equity held relative to the bank should result in lower mortgage interest payments. Then try to pay off the mortgage as quickly as possible . This will mean that you will end up paying the smallest amount of interest possible over the life if the mortgage. After that time you will be putting more money into your own pocket instead of in someone else's.  If possible you also want to be saving for your next deposit in the meantime. Wouldn't it be incredible if you could put a deposit down on a new house and still own an investment property (your old house) to help you to pay the mortgage!

I know what you're thinking. Many of you will be wondering how you're supposed to save for a deposit and pay off a mortgage at the same time. Unfortunately this isn't easy. It will require a lot of discipline and sacrifice. As always, your pension should come out of your income before you even think about receiving it. Then automate your savings to come out of your net of tax income at the start if each month. Following that, pay your mortgage payment and bills. The rest is for spending however you like. Bear in mind that your mortgage payments will be pretty hefty if you're looking to pay it off quickly (5-15 years), however the long run benefits could be invaluable.

ISAs and group theory

It's simple: once you've invested in your pension (watch out for future articles to figure out how much you should be putting in your pension) any additional savings (and there certainly should be some!) should go into an ISA tax wrapper to protect it from tax. 

Married couples are able to share the ISA allowance. So if one partner has fully utilized their ISA for the year of £11,580, and their spouse has only used £5,000 of their own allowance, then the first person is allowed to make an additional ISA contribution of £6,580. The is possible by transferring savings from one partner to utilize their unused allowance.

Many people believe that they should only utilize their cash ISA allowance of £5,640, missing out on the opportunity to protect an additional £5,640 from taxation. Once you have saved up 6 months worth of salary (net of tax), have a sufficient float of about £1,500 in your current account and you've saved up for your holiday and any upcoming large payments, then there really is little cause for holding a lot of cash. Whilst cash is fairly risk free, no one ever got rich holding cash. You need to make your money work for you and that means making investments in bonds, companies and/or property. Since  you will be putting in money that you do not need for the next few years the risk associated with investments falls as you have time on your side to ride out any shocks. So make sure you try to utilize all of your ISA allowance!

A while ago, I suggested a slightly different approach to investments - that you should join together with other family members and other people that you trust and invest together, reinvesting profits. Decision making will be improved through the pressure to explain your investment idea to other members of the investment group as well as risk being spread between several people. Having more money to invest will also give you access to funds and stocks that you may not otherwise have been able to purchase as there were "minimum investment limits". Furthermore, you share the cost of transactions between yourselves and gain economies of scale. For example, a broker may charge £20 per transaction. For a person investing £1,000 that means that the transaction costs are 2%. However, if 10 of you got together to make the investment, each with £1,000, making a total investment of £10,000 then the transaction cost of £20 represents only 0.2%, with each individual paying £2 of the transaction fee rather than £20.

Children and their preparation

Formal Education, love, care and providing a safe environment are considered key to a child's upbringing. It is thought that with these tools will lead to children having a successful and prosperous life. Many parents leave out the financial education. This is a disservice to children. Whilst they may provide for their children in every way except financial education, they actually damage their children's chances to become a success.

So what do I suggest:

1. Teach good saving habits by encouraging them to save a portion of their pocket money by matching their savings contribution. Likewise could go for the money they may collect at birthdays and Christmases. Make sure that you take them to open a bank account early in their lives.
2. Encourage them to start a small business in their summer holidays or get a part time job for a couple of days a week. 
3. Let your children pay for certain things such as mobile phone contracts and spending on entertainment. This should teach them the value of money.
4. Explain about debt and encourage them to avoid most forms of debt

Obviously you want to make sure that your children will grow up, able to fully take care of their own finances and this is why financial education is important. Many of you will want to give your children a head start in life. For that I encourage you to make sure that they utilize their ISAs. You could even look after their future and start paying into a pension pot for them. Remember that children could have up to 18 years before they may leave home and have to fend for themselves. Almost two decades of investing before funds may be required in cash means that you can afford to place your children's future money in fairly risky investments for a greater return.

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