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The news of a new arrival is a symphony of emotions – joy, excitement, and perhaps a touch of apprehension. Yet, amidst this beautiful anticipation, a practical reality often emerges: the financial implications of taking time off work.
For financial advisers and professionals in the financial services sector, guiding clients through this period isn’t just a service, it’s an opportunity to empower families during one of life’s most significant transitions.
New parents frequently grapple with questions about maintaining income, managing increased household expenses, and the long-term career implications of taking time away.
In Australia, a robust framework of government and employer-provided schemes supports parents taking time off to care for a newborn or newly adopted child. Understanding these entitlements is the foundational step in effective financial planning.
The government’s Paid Parental Leave (PPL) scheme provides eligible primary carers with up to 20 weeks (100 days) of payment at the national minimum wage, typically paid fortnightly. This offers flexibility, allowing it to be taken in a continuous block or in up to two blocks within 24 months of the child’s birth or adoption.
To claim the PPL, people need to verify current work and income test criteria on the Services Australia website. Generally, this involves having worked for at least 10 of the 13 months prior to birth/adoption and meeting income thresholds.
Up to two weeks of Partner Pay, also at the national minimum wage, is also available to eligible fathers or partners, which offers vital support in the immediate post-arrival period.
Plan ahead for benefits
To maximise these government benefits, pre-emptive applications may avoid payment delays.
There is an option to take PPL in multiple blocks to strategically extend financial support, to integrate with any employer-provided benefits to optimise your overall leave strategy.
Many Australian employers offer their own parental leave benefits, often more generous than government entitlements, and these schemes vary widely, making a thorough review of available options essential.
Look for the duration of leave (how much paid and unpaid leave is available), the pay level (whether it’s full pay, a percentage of salary, or a fixed amount), whether superannuation contributions will continue during paid or unpaid leave, and any specific conditions for access, such as length of service.
To maximise these employer benefits, you may be able to strategically blend government and employer leave to get the most time off and income. For example, you might use employer-paid leave first, then transition to government PPL. In some instances, particularly for highly valued employees, there might even be scope to negotiate terms. It’s also worth discussing any available return-to-work bonuses or flexible work arrangements.
Budgeting is a must
Even with government and employer support, parental leave often means a temporary income reduction alongside new baby-related expenses.
This is when a robust budget isn’t just helpful it’s essential to plan well before the baby’s arrival, to account for the impending changes.
This involves meticulously tracking current expenses for at least a month to understand existing cash flow, researching and estimating both one-off baby purchases (like a cot, pram, car seat) and ongoing expenses (such as nappies, formula, wipes, and potential future childcare costs), and factoring in increased utility bills.
People should also project their expected income during leave, incorporating all benefits, to identify any potential gaps and, based on these projections, pinpoint non-essential spending that can be reduced or eliminated both pre-leave and during leave, like dining out or subscriptions.
Crucially, you should aim for a financial buffer or emergency fund covering three to six months of essential living expenses, as this serves as a vital peace-of-mind fund.
Once leave commences, active budget monitoring and flexibility are key. Review income and expenses weekly or fortnightly to stay on track, focusing spending on essential baby and household items while deferring non-urgent purchases.
You can significantly save money by embracing second-hand baby gear, clothing, and toys, and by doing more meal planning and cooking at home to reduce takeaway and dining out.
It’s also wise to leverage free community resources like playgroups, libraries, and support groups for social interaction and information.
Finally, you should be agile and prepared to adjust their budget if actual income or expenses deviate from initial projections.
Watching investments and insurance
Beyond basic budgeting, several proactive strategies can enhance financial resilience. The most potent strategy is to start saving and investing well in advance.
Even small, consistent contributions build a substantial cushion, and people might consider setting up a dedicated savings account specifically for parental leave funds and automating regular transfers to ensure consistent saving.
For those with existing investments, it’s wise to review your portfolio’s alignment with their risk tolerance and time horizon, potentially adjusting contributions temporarily to prioritise cash flow.
You may also like to temporarily reduce mortgage or loan repayments, but always with a clear understanding of long-term interest implications.
While not always possible for busy new parents, exploring flexible income diversification can add security. This might involve considering part-time freelance or gig work if energy and time allow, or, if prior investments permit, leveraging passive income streams as a valuable supplement.
Finally, ensure robust insurance coverage is in place. This includes reviewing health insurance for coverage during pregnancy, childbirth, and newborn care, understanding income protection terms for support during illness or disability, and reassessing the adequacy of life insurance given the new financial responsibilities.
Planning for parental leave isn’t merely about managing money; it’s about investing in a foundational period of family life.
By understanding benefits, mastering budgeting, and proactively enhancing financial security, new parents can confidently embrace this transformative experience.
Financial advisers are pivotal in guiding clients through parental leave planning. Find a Planner here.
The Money & Life website is operated by the Financial Advice Association (FAAA). The views expressed in this article are those of the author and not those of the FAAA. The FAAA does not endorse or otherwise assume responsibility for any financial product advice which may be contained in the article. Nor does it endorse or assume responsibility for the information.
