Should You Protect Your Income? The Ultimate How to Guide

Do you need income protection?

Should You Protect Your Income? The Ultimate How to Guide

There are massive changes coming to income protection.

Despite being the most expensive personal insurance, and premiums increasing recently, insurers are losing money annually.

The Australian Prudential Regulation Authority (APRA) has stepped in to address concerns about insurance provider sustainability. An open letter from APRA to insurers outlines its intentions for the near future.

Changes are planned to commence March 31st 2020, when it will likely become impossible to secure “Agreed value” policies covering more than income in the 12 months preceding the claim.

From July 2021, further changes are expected, with abolition of agreed value policies altogether and insurance policies requiring renewal every 5 years – under new terms and conditions.


My take on this is that income protection is going to become even more expensive, and less generous.  If you are considering starting a policy, talk to an adviser as soon as possible to try and get in before the changes.

What is Income Protection? How Does it Work?

Income protection is the personal insurance you are most likely to claim.  It provides a regular income in case of inability to work due to illness or injury.

Those over the age of 25 will usually have some automatic income protection through their superannuation, but those under 25 have to request insurance.

We see patients becoming unexpectedly injured or severely unwell at work all the time, but often don’t consider the financial consequences of lost income – which can be severe enough to cause home repossession.

Most people, including doctors, feel somehow immune to these random events, but of course they can happen to anyone.

Do you need income protection?

Do You Need Income Protection?

This really depends on your situation.  What would happen if you contracted an illness or catastrophic accident requiring months to years off work?

Unless you are financially independent through investments, or have someone who loves you earning more than enough to support you both, it is likely you should have some income protection.

Even if you don’t need insurance now, it is worth considering whether your needs are likely to change.  Do you plan to have children?  If you will need income protection within the next 5 years, consider securing the policy now.  Premiums escalate surprisingly rapidly as you age (significantly in 2-3 years during my 30s as I discovered!)  Delay also risks developing a medical condition in the meantime that could make you un-insurable, far more expensive to insure or have significant exclusions in your policy.

How much Income protection do You need?

This is tricky!  It will take a detailed look at your budget, and what your obligatory expenses are (you won’t be holidaying overseas if your ill enough to claim income protection).

Then you need to look into the future and anticipate changes to those expenses.  For the reasons outlined above, it’s best to make your policy as future proof as possible.

Consider other sources of income. How much of your obligatory expenses could be covered by your partners income?  Do you have any investment income coming in that would continue despite illness or injury? Also take in to account any significant long-term savings that could help financially support you.

Remember to calculate gross income required – your benefits will be taxed as personal income.  You may (in the next few months) still be able to secure an “Agreed value” insurance policy.  This means you will be paid a prior agreed benefit in the event of a claim (Up to $30,000 per month).

It is likely agreed value insurance policies will not be possible after July 2021 (perhaps sooner).

The other type of policy (the new norm) is “Indemnity Value” – the benefit paid is based on your income immediately prior to the claim.

Indemnity value policies may be better for those going up the payscale over the next few years, but could be disastrous for individuals becoming ill or injured after 12 months of parental leave, other extended time off work, or the 1st year of a private practice before profits kick in.  It also could be detrimental for those whose health has been deteriorating for a period of time, and who have reduced hours worked as a result.

If taking out an indemnity value policy, try to find one that will calculate the benefit on your income over the past 3 years to minimise the risk of being short changed.

How to choose the best income protection policy

Can You get Income protection?

Your ability to secure a policy depends on age, medical history and “Risky” activities and occupations.  Chronic illnesses, extended periods of time off sick or a history that is perceived as high risk to insurers (especially back pain in men, anxiety in women) will make securing a policy more difficult and more expensive.

Sometimes insurers will offer a policy with specific exclusions that won’t be covered if they recur (such as back pain if you once complained of pain in the back!).  It is definitely not worth lying about your history, as the insurance providers will not pay out if they find you have been dishonest (even if it’s completely irrelevant to the eventual claim).

Exclusions can be reviewed and sometimes removed at a later date, provided you have had no further issues, you have a good insurance broker to negotiate on your behalf, and the provider decides to play ball.

When does Income protection kick in?

You can choose different waiting periods before your income protection starts paying benefits, usually 30, 60 or 90 days.  This should be based on your amount of sick leave accrued (assuming you are staying with your current employer) and how long your emergency fund would last if the worst happened.

Premiums drop significantly as you increase the waiting period.  Do remember, though, that if you have two episodes of illness with a brief return to work between, the waiting period may have to be served for the second illness again.

who needs income protection?

How long does Income protection last?

Superannuation income protection policies often pay out for only 2 years – not much use if your surgical career is ended by a traumatic limb amputation.  Other policies continue to age 60 or 65 years, which will provide long lasting income replacement – at significant cost.

When considering how long you need income protection for, consider your savings, debt, partner income, dependents, your age, superannuation balance, and your Total permanent disability insurance payable if you were never able to return to work.

Own Occupation vs Any Occupation

Many cheaper insurance policies (including those that come with your superannuation) will only pay out if the insured cannot work in any capacity.

Unless you can cover your expenses with a minimum wage job (I’m impressed if you can!) get own occupation insurance.  Again, you will pay extra for this.

Should You Buy Income Protection Inside or Outside Superannuation

Premiums are tax deductible whether they are in or out side of super.  If you need to claim on the insurance, income is taxed at your marginal rate, regardless of whether premiums were paid inside or outside superannuation.

Paying from within superannuation can help affordability at the time if cash flow is tight.   If you are not salary sacrificing the maximum into superannuation, increasing your salary sacrifice to cover the premiums is a tax efficient way to pay.

If no extra is contributed to superannuation to cover into the premium, they will eat into your superannuation balance and cost a lot more in the long-term due to lost investment earnings on the premium amount.

Insurance inside superannuation is often cheaper, and the most hassle-free way to secure insurance. Unfortunately, superannuation income protection is often an inferior product, often paying benefits for only 1-2 years.

Benefits may cease if the insured becomes permanently incapacitated (qualifying for Total permanent disability if they have it).

For protection inside super, the unwell person needs to meet the legal condition of release of superannuation law as well as the insurance policy definition of incapacity.

Insurance inside superannuation cannot be moved to another superannuation provider.  If the insured is moving employers, they must either keep the same superannuation or start a new policy.

As well as excess management fees associated with multiple superannuation accounts, automatic insurance could mean individuals with more than one super account are paying multiple insurance premiums.

If the insurance is left with an old superannuation account, and the premiums consume the entire balance, the insurance will obviously be cancelled.

Income protection inside superannuation may be appropriate for you if you have few expenses, or have significant savings and no plans for adding dependents to your household.  You also need to have reviewed your superannuation and made sure you’re happy using the fund for the long-term.

If you have insurance through your superannuation, it is worth checking your occupation rating.

Doctors (apart from retrieval) are considered low risk and therefore attract a cheaper premium, as long as the correct occupation rating is applied.  If you are automatically enrolled as a blue-collar worker, you are paying more than you should.

Income protection insurance outside super has a larger choice of features and usually more extensive cover available, at a greater cost.  It is a hassle to get set up – requiring medical underwriting, lots of paperwork and lots of questions from the insurance company.  But once it’s set up, as long as you pay the premiums, could last as long as you need income protection (before July 2021).

Stepped or Level Premiums

You have a choice of two fee structures.  Stepped premiums start out much cheaper and are based on age, but escalate significantly as you get older.

Level premiums start out significantly more expensive but do not increase with age, and are generally considered more cost effective if income protection is required for 10 years or more.

Over the past 5 years, even level premiums have increased significantly due to an increase in claims. I had been horrified by my “level” premium increases, but now read that the insurance industry has been making massive losses for the past 5 years – and frankly it benefits no-one if these companies go bust.

Income protection and other payments

It is worth checking whether your income protection policy will continue paying benefits even if you qualify for TPD.  This will make a huge difference on how long you should have income protection benefits for (2 years or up to age 65) and how much TPD you require.

Income protection is taxed as normal income (assuming you’ve claimed tax deductions on the premiums), so remember this when planning how much you require.  Base your benefit amount on gross income required. The ATO have a simple tax calculator to help you work this out. https://www.ato.gov.au/calculators-and-tools/simple-tax-calculator/

Look at the small print on whether premiums are reduced should you receive compensation payment or social security benefits

Income Protection and Tax

Income protection is a tax-deductible expense.  Insurance benefits paid in the event of a claim are therefore taxed as normal income

Can I claim income protection on tax?

Does Your Policy Cover Partial Disability?

Check whether partial disability is covered.   When Dr Cristina Yang was stabbed in the abdomen with an icicle , she probably wouldn’t have been able to return to work for a while.  Her employer may have put her on a “Return to work” program of half shifts two or three times a week.  Would her Income protection policy have covered the rest of her income?

If a self-employed anaesthetist has a fracture requiring a dominant hand plaster cast, he will be able to perform some administrative tasks but will not be able to anaesthetise patients – likely leading to a significant reduction in income.  Will income protection make up the difference?

Do you get paid super?

I’m reading a lot about inadequate retirement savings lately.  Periods of time not contributing to your superannuation (eg parental leave, extended time off work) make a significant dent in retirement savings.  It is possible to get a policy that pays superannuation, just as an employer would.  You guessed it – at a cost.  Decide whether you need it, and check this small print when comparing policies.

best income protection

Index linking

Is the income protection benefit index linked?  This means the benefit paid increases with time to compensate for inflation.  If Dr John Dorian suffered a major head injury from his scooter, aged 25, will his income protection benefit still cover his expenses in 40 years time?  Not a major issue if you only need income protection for a few years, but worth getting if needed for a decade or more.

General exclusions

Policies also have general exclusions that they will not pay for – Usually they will not pay if the insured is in a combat zone, injured due to acts of war or terrorism or no longer an Australian resident, illness as a result of pandemic or pre-existing condition, self-harm and attempted suicide.  Similar to your house or car insurance, it’s important to read and compare the policies in detail to understand what is covered and what is not.

How much does income protection cost?

This is extremely variable depending on age, waiting period, length of benefit payments, pre-existing conditions etc.  Expect to pay anywhere between 2 and 5% of the benefit amount as a premium (Mine comes to 3% currently).

If you are buying several polices, ask for a discount!

Where to buy the best income protection?

You have three options – through your superannuation, through an insurance broker, or direct.

Income protection is extremely complex, and is absolutely no use if you buy a policy that in the event of a reasonable claim, does not pay out.

A broker will have a great understanding of all the pros and cons of different policies and help you weigh up what is most important.  They should also manage the claim process in event of illness of injury.  As you may know, insurance companies in general like to avoid paying out, so it would be beneficial, in my view, to have someone experienced and knowledgeable negotiating on your behalf.

Insurance brokers are paid a significant amount of commission for signing you up, so they are clearly not independent.  It probably makes sense to work with more than one insurance broker, and get quotes from direct insurers and carefully compare the terms of the policies.  It’s advisable to get all this right the first time so you only have to do it once!

When to stop income protection?

Insurance companies would like you to stay fit and well (Awww!) and working while paying premiums for the rest of your working career.  Premiums will increase as time passes, and stepped premiums will escalate dramatically as you age.

In order to be cost effective as possible, you need income protection for the minimum time you really need it – often with debt, dependents and little in the form of assets.  As debt is paid down, dependents become independent and asset base grows, there will come the point you can self-insure.  Make sure you assess this carefully, and only cancel your policy when you’re sure you don’t need it. I imagine it will be a great feeling to get rid of those hefty premiums once and for all!

 

Income protection is a fairly complex topic, thanks for sticking with me through this mammoth guide!

At the end of the day most people will find they have to balance their needs with keeping insurance premiums reasonable.  I hope this guide gives you an idea where you can make compromises.

Did you get the TV Medical drama references or am I just showing my age?! Go on…indulge me.  Who is your favourite TV Doc?

Now go ahead and work out your insurance needs, and get that policy sorted ASAP. 

 

Do I REALLY Have to Save an Emergency Fund?

Do I REALLY Have to Save an Emergency Fund?

  • Consider what kind of (and cost of) emergencies that could happen
  • Assess your current financial situation
  • Weigh up peace of mind vs opportunity cost
  • Decide on size of emergency fund
  • Work out a savings plan and do it!

Unless this is the first personal finance article you have read, you will be familiar with the recommendation to have 3-6 months expenses (or more!) saved in case the unexpected occurs.

The Barefoot investor calls it “Mojo” to make it sound more interesting.  Being able to cope with unexpected financial setbacks is an essential pillar of financial security.

But if you are desperate to get your debt under control, or itching to dive into investing, saving for an emergency fund is slow and frustrating.  The White Coat Investor and other high profile US physician bloggers feel they don’t need an emergency fund.

So do you, as a doctor, really need an emergency fund?

It depends.

What Types of Emergencies Could Affect You?

This is very variable depending on your situation.  What sort of emergencies could happen to you or your household?

Do you own a house?  Large house repair eg Replace water heater or major roof leak $5000-$10000

Do you live far from extended family? – Flights home and time off work in case of that dreaded family member emergency

Do you have sick leave accrued and own occupation income protection?  What is your waiting period and duration of payment (2 yrs vs until 65)?  If you were too ill to work would you need to cover expenses with savings?

How secure is your income source(s): Do you have a permanent or temporary contract if employed, work as a locum or private practice?  Is there another income earner in the household?

Do you have dependents?

How much are your monthly expenses?  If you had to cut all the fluff, how much would you need for your household to make mortgage/rent payments, pay for food and utilities, school fees and other essentials?

Do you have negatively geared property? Or leveraged investments that could be margin called in a market crash?

Emergency fund for family emergencies

What is Your Financial Situation?

Are you already in debt? I wouldn’t count HELP, as this does not need to be paid if your income stops.  But if you already have credit card or Afterpay debt that isn’t paid off monthly, you’re in a vulnerable position.

How much surplus income do you save per month?  Is it enough to cover emergencies anticipated in a single month?

How much extra do you have sat in your mortgage?  With a redraw facility or HELOC this can be considered your emergency fund if sufficient

How much tax to be paid is sitting in your account for most of the year?  Due to effective tax planning, I plan to always have around several thousand dollars in my “Tax to be paid” account, offset against my mortgage.  This could be used short term in an emergency, and re-earned before tax is due.  I earn the next year’s ABN cash before I have to pay the last years tax.

Do you have a buffer(s) in your everyday account(s) or offsets?  Kids savings account that (at a push, and temporarily) could be used to get you out of trouble?

emeregncy fund reduces stress

Peace of Mind Vs Opportunity Cost

The White Coat investor is financially independent, with multiple income sources.  Having tens of thousands of dollars earning 2-4% in a “High interest” savings account or mortgage offset account is inefficient in comparison with long-term investing returns.  If you have income far in excess of your expenses, perhaps an emergency fund is unnecessary.

Three years ago, our car died dramatically.  My partner was stuck in a dusty somewhere in the middle of nowhere.  Myself, 1 and 4 year old had flown home in luxury.  My partner was hundreds of thousands of kilometres away, hostage to the nearest tow service and car mechanic.  It cost $10,000 to get my partner home on Christmas Eve (to our childrens’ delight), and of course the car has never run right since.

For most of us, some kind of emergency fund seems prudent. But you may have enough cash that is lying around anyway that you don’t plan to spend and can double as part or all of your emergency fund.

I have a buffer in my everyday account in case my employer forgets to pay me (it’s happened) or expenses going out are larger than expected), $2000 in a “house” account to cover replacing broken appliances and extra mortgage repayments that could be withdrawn.  I also have my “To be paid” tax sat in an offset and some kids’ education savings sat in an account earning 5%  that could be quickly access in a real emergency.

If you’re just starting out, you likely don’t have money “just lying around’.  The priority is paying down consumer debt, in my opinion.  there is no point in saving into an emergency account paying 2-4% if your outstanding credit card debt is charging interest over 10%.  In this situation, I think you’re stuck using the credit card as your emergency fund until you have paid it off.

If you have a mortgage, the easiest and most efficient place to park your emergency fund is in an offset.  A redraw is also reasonable.

If you don’t, you’re stuck with a “High interest” savings account.  The easiest, simplest and lowest risk choice is to find an account with $0 fees, and a reasonable interest rate.  At the time of writing ME Bank offered 2.2%.

If you can be bothered opening multiple accounts, its possible to get a slightly higher interest rate (2.6% currently) for an introductory period – and move your savings from one bonus introductory account to another every few months.

If you have several months of pay saved  up in case of emergencies because you have unreliable or lumpy income, term deposits or even a bond index may be worth looking in to for the savings not required immediately.

Unless you are financially independent, or have monthly surplus in excess of the cost of potential emergencies, I believe some sort of emergency fund is wise.  Going without really does seem to be tempting fate!

Sit down and work out how much of your income, below is a table to use as a starting point.



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How to Save a Deposit & Buy Your First Home

Property vs shares

How to Save a Deposit & Buy Your First Home

There is not much online specifically for Australian doctors buying their first home, especially outside banks or mortgage brokers trying to sell you their products.  There are some specific differences to others buying a home, including the fact that doctors often move frequently for training and can get lenders mortgage insurance (LMI) waived.  If you are saving (or have saved) for that elusive deposit, add your tips for other savers at the bottom of this post!  For those saving to buy in Melbourne or Sydney, the challenge can be daunting, but after the recent correction, these markets are more affordable than they have been for many years.

Before we start, are you absolutely sure you want to buy a home?  This is a huge financial commitment which can build wealth or slow your journey to financial freedom.  Read this article (including a buy vs rent calculator) to check you’re making a well informed decision to buy.

How much house can I afford?

How Much Can I Borrow to Buy a Home?

Most of us want more house than we can or should afford, it’s human nature. Some doctors buy so much house they are cash poor and suffer financial stress despite their generous pays.  I personally hate the idea of financial stress, and highly value the ability to take time off at half pay, and plenty of cash left over for holidays and fun. I understand this is extremely challenging in the bigger cities, and is also a personal value decision.

Committing to a huge mortgage can pay off if you buy an excellently located property. It paid off for many of our parents 30+ years ago, but the return is not guaranteed.  Most home buyers feel they have to make compromises to buy a home they can love with a manageable mortgage.

When considering how much house you can afford, think about:

  • Are you planning to have children and reduce to one wage for a period?
  • Do you plan to have children and want to be in a good public school district?
  • Are you going to have to move for training in the next 5 years?
  • Do you plan on a fellowship or time working or traveling overseas
  • Look at the picture for the next 5+ years to work out what are your priorities

With the above in mind work out how much of your monthly pay you are willing to pay towards your mortgage.  There is a great mortgage calculator for this on the Money Smart website.

If the area you are buying in is a great capital growth area, then you could perhaps consider your principal place of residence an asset.  You can find historical 10 year average capital growth and also demand to supply ratio (an indicator of likely near term growth) at  Your Investment Property.

Extra Costs of Owning vs Renting

Rates are based on the value of the property, and differ according to which state and council you’re property is in.  The average home owner will pay $2000-$3000 per year in rates.  You can look on the local council website to get a rough idea of rates in your area.

Maintenance costs are unpredictable.  1.5% of the property value per year is often quoted for maintenance, but repair costs come in unexpected lumps.  Your hot water heater may die the day you move in, so it’s important to have some cash saved just for emergency repairs.

Home insurance, life and Total permanent disability and income protection insurance become more important when you take on lots of debt, consider how much you need and whether the premiums will need to increase when you buy your home.

How to choose an investment property

Where to Keep Your Home Deposit Savings

Online High Interest Savings Account

The easiest, simplest and lowest risk choice is to find an account with $0 fees, and a reasonable interest rate.  At the time of writing ME Bank offered 2.2%.

If you can be bothered opening multiple accounts, its possible to get a slightly higher interest rate (2.6% currently) for an introductory period – and move your savings from one bonus introductory account to another every few months.

Check the conditions and assess whether they are suitable.  Some accounts require a number of EFTPOS payments, others require an amount deposited monthly, without withdrawals, in order to achieve the advertised interest rate.

One other thing to watch for, the banks can change your interest rate, and in my experience don’t let you know.

Term Deposits

If you already have a lump sum saved (at least $1000), a term deposit will give you a fixed interest rate (which may be advantageous if rates drop further), but lock your money away for a specified amount of time.  At the moment, a brief search for term deposits indicates they pay less than the above interest accounts, presumably because interest rates are expected to drop further. These can become more attractive when interest rates rise.

First Home Savers Scheme

You can contribute voluntary payments (up to $15000 per year and $30000 total) to your super account through salary sacrifice or a tax-deductible contribution.

You will pay 15% tax on contributions as long as the total contributed per year is less than $25,000 and you earn less than $250,000 per annum.

The ATO will tax contributions and (artificially calculated) earnings at marginal rate minus 30% at withdrawal. If you are in the 37% tax bracket, this will mean ~$6200 saved in tax that can go towards your deposit instead.

The best resources I have found on this are Super Guide and the ATO website. It can take up to a month to withdraw your money, you must purchase within 12 months of withdrawing the money, and you must live in the property for at least 6 of the first 12 months you own it.  I think the FHSSS ideal for those with plans to buy their first home within the next 2-5 years.

Investing

Investing outside the above options, for example in the stock market is only really an option if you don’t have your heart set on buying your home within a specific time frame.  If you were to invest in index funds, for example, you may get a much better return than from a high interest bank account or term deposit, but with much higher volatility.  If the stock market were to drop by 50% it could take months or years to recover.

Peer to Peer Lending

Money can be lent directly to individuals via a platform such as Ratesetter.  Rates of interest are higher (currently 3.5-7.7%) but there is no guarantee you will get your money back.  So far all loans have been repaid by borrower or the platform but if a large number of borrowers were to default on the loan investors would lose their money.  This is too risky to be recommended, especially when you are saving for a home.

What to Do While Your Saving - Optimise Borrowing Capacity

Since the Royal Commission, when assessing borrowing potential, banks scrutinize your spending in detail.  You will be cleaning this up to save, but especially in the 6 months leading up to mortgage application it is helpful to make financial records as self-controlled as possible!

Credit card limits (even if you don’t use them or pay them off every month) can reduce the amount banks will lend you, so consider reducing limits or closing credit cards you don’t use.

With some time up your sleeve, it’s worth applying for your credit score.  You can obtain a free annual credit score from Equifax.com.au and keep track of your score monthly on creditsavvy.com.au.

Make sure all your bills and credit cards have direct debits set up so you never miss a payment and reduce or clear existing debts if possible.

HECS debt can reduce your borrowing power, due to repayments but it is the cheapest available debt and I would only consider paying this off if it is stopping you from being able to buy.

How to Save a Home Deposit Faster

Parental guarantee

This is how I got into my first property, still in medical school.  If parents are willing to help out, this is a MASSIVE step up.  If mum or dad have equity in their home, they can offer that as extra security for the kid’s loan.

Going guarantor is not risk free and requires a lot of trust between parents and offspring.  If the child defaults on the loan, the bank will sell the home, but if there is a shortfall the parents will be liable.  The guarantee can be limited to the 20% deposit amount to reduce liability for parents, but will save paying LMI if your unable to get out of it any other way.

First home buyers scheme

This is another way to get onto the property ladder with a minimal deposit.  Singles earning less than $125,000 or couples earning up to $200000 can apply for one of 10,000 places on the first home buyers’ scheme.  The remaining 15% deposit is covered by a government guarantee, meaning no LMI.  The scheme starts January 1st 2020

Australian property rent or buy

How To Buy Your First Home

See a Mortgage Broker for a Pre-Approval

Start this process before the house hunt begins.  You will want to know realistically how much you can borrow, and be able to submit offers fast when you find the perfect home.

Do you want fixed or variable rates?  With rates at an all time low, it seems reasonable to lock in, especially if you will be stretched by an increase in rates.

Over the long term the banks tend to win this game, and price their fixed rates to ensure they profit despite future changes.  If you can afford a 3 % increase in rates you are probably better off with variable.

Compare set up and ongoing costs between loan alternatives, as well as interest rate (watch out for the “introductory rate” which jumps after a certain amount of time ).

House hunt!

Now comes the fun bit! Good luck!  Try to think ahead a few years, as needing to upgrade your home will cost lots in fees (6% buying + 2% buying).

When you have found the house you love, paid a deposit (often 10%) and signed a contract, remember to get insurance for your new home immediately. If the house burns down between signing the contract and exchange, you want to be fully insured!

Income protection, life and TPD insurance become more important with a large amount of debt.  Look at some of the terrible luck your patients have had.  Severe accidents, life threatening illness and untimely death can all happen to healthy young people.

Consider the needs of your family if you were to die, become permanently disabled or no longer able to provide an income.  Same for your partner if you have one.  Then organize insurance.  Income protection is tax deductible, and all insurances will be cheaper if organized younger before collecting any co-morbidities.

I hope this step by step-guide of saving for and buying your first home has been helpful.  What tips can you share on how to save more cash for your deposit?  Comment below to help out other Aussie docs with your great ideas!

Thinking of Starting a Family? Plan Ahead

financial planning for maternity leave

Questions about balancing work and raising a family are commonly asked by junior doctors.  For those wondering, there really is no perfect time to start your family.  It will always be challenging, but wonderful to have these competing interests in your life.

Some choose to start early, enjoying relatively youthful parenting, others wait until most of the hard training time and exams are over, aware that time is always ticking away. This is a personal choice, and different options obviously suit different families.  But there are a few issues to be aware of, and plan around to minimize financial stress.

financial planning for maternity leave
financial planning for maternity leave

Time to Bond...

In order to be legally entitled to parental leave, you have to have been employed by your employer for twelve months before the actual, or expected date of birth, date of adoption, or 1st day of leave.  The legal entitlement is to 52 weeks of unpaid leave, with an option to request a further 52 weeks (although the employer can decline this).

The Australian Health system has generous parental leave benefits available, but due to the widespread use of temporary contracts, and being required to move hospitals for training, many doctors have missed out on paid parent leave (PPL).  PPL is definitely worth considering timing for, as it will give most families far more time to bond.  It is also worth having union membership, and attempting to get leave entitlements transferred between health services.  If you are planning to stay in one health service for a long period, it is possible to negotiate a contract for more than one year.  There is some variation in maternity leave according to health service.  Leave can generally be taken at half pay for twice as long.

Entitled after

Paid parental leave

Paid Paternal Leave

NSW

40 weeks

14 weeks

Paid 1 week

VIC

12 months

10 weeks

Paid 1 weeks

QLD

12 months

14 weeks

Paid 1 week

WA

12 months

14 weeks

Unpaid

ACT

12 months

18 weeks

Paid 2 weeks

TAS

SA

NT

12 months

12 months

12 months

12 weeks

16 weeks (20 weeks if employed by SA for 5 years +!)

14 weeks (18 weeks if employed by NT health for 5 years +)

Unpaid

1 week paid

0-2 weeks paid depending on length of service

Obviously, if you are self employed (as a GP or private specialist), you’re on your own!  Forward planning and lots of saving will obviously make the financial stress far less of a burden.

The Government provide Paid Parental Leave for 18 weeks at National Minimum Wage to the baby’s primary caregiver if they earned less than $150,000 during the previous financial year.  There are detailed eligibility criteria on the website linked, but working mother’s are entitled to this even if they are receiving PPL from work.  It is paid via your employer.  If you are self-employed, or not eligible for maternity leave this will help ends meet, and be gratefully received.  If you are in the fortunate position of being paid PPL from work, this government PPL is a nice bonus that could get lost in the weekly expenses if not consciously allocated.  Many parents use this allowance to start an education fund for their baby if it is not needed to fund maternity leave.

The Government also pay Dad and Partner pay – up to two weeks at National Minimum Wage for working dads, but they must not be being paid by work at the same time

Training Considerations

AHPRA require all registered doctors to meet minimum CPD standards per year (As per specialty or for general registration 50 hours over 1 year) plus have recency of practice standards: 152 hours within a registration period OR 456 hours over three registration periods.  These are not too difficult to meet despite extended time off as long as you plan ahead.

There is wide variation in how the specialty colleges treat maternity leave, and this unfortunately encourages more females to leave certain training programs. Most colleges have a maximum training time, and this can be an issue for parents wanting multiple children.  It is worth checking your college’s requirements well before baby is expected!

Doctor specialty training maternity leave

Planning Finances for Parental Leave...

It’s essential to plan in detail, making sure you’re prepared for the financial challenges of taking time off will help take the pressure off and allow you to focus on the most important thing – your family.

Calculate Your Anticipated Expenses –

It’s time for a good old fashioned budget!  In my experience these fanciful spreadsheets show little correlation to what is actually spent! PocketBook is a free app that you can link all bank accounts and credit cards, to categorize what was actually spent over a 12 month period.  Sign up, ensure your expenses are categorized appropriately, and use it to project anticipated monthly expenses during your time off. 

Work out Your Anticipated Income –

  • PPL from work
  • Partner income
  • Government PPL
  • Government dad and partner pay
  • How long are you taking off work?
  • Will you supplement with any part-time work before going back to work fully?

Calculate Income Minus Expenses –

Does anyone EVER come up with surplus income after completing this calculation?! If you’re in the black, check you’ve done the maths right and move on to the next step

If you’re in the red, time to go over those expenses with a fine tooth comb.  What can be reduced or cut out to allow you the time off you desire?

Savings plan –

If you’re still in the red, time to work out how much time you have until starting maternity leave.  Calculate how much you need to save per paycheck. Moneysmart have a handy savings calculator.  A mortgage offset account is the best place to store these savings, or a high interest savings account if you aren’t mortgaged up.

Family finance, Medicine and kids, maternity leave

Planning for the Future

Your Future

Rarely do you get ahead by thinking short-term. Women currently retire with an average 47% less than men.  Maternity leave and part-time work are significant contributors to the gap.

Spouse Super Contributions – If you or your partner will earn less than $40K in a financial year, the higher income earner can claim up to $540 tax offset by contributing $3000 to your super ($120/FN).

Government Co-Contribution – If you or your partner earn less than $57K in a financial year and make $1000 after tax contributions ($40/FN), the government will partially match your contributions with up to $500!

Maximise your Concessional Super Contribution – If you’re not maxing this out, consider salary sacrificing extra in to super

Your Family’s Future

Consider your ongoing budget after baby is born.  When are you and your partner going back to work?  Full or part-time?  Are you planning a house move?  Private education?  What would you like your lifestyle to look like?  Can you afford it?  Do you need to make any changes to your expenses to save for the future?

Your Child’s Future

Do you wish to save for your child’s education costs, university, house deposit?  Consider whether you would like to automate a small amount of savings towards your goals for your child each pay check. Regardless of whether you want to give your child a financial step up, Scott Pape’s (The Barefoot Investor) book on money & kids is a great resource.
Saving money for baby

Shopping for Baby

It’s probably best you get a firm understanding of your financial situation before going wild shopping for your little one. Baby preparation costs range from zero to thousands of dollars.  It is so tempting to buy the “Best” (aka most expensive) or everything, but this benefits… who?  The bub doesn’t care, and it won’t benefit your family if you actually can’t afford it.  So work out what situation your in, what, if anything you would like to splurge on, and consider asking family, friends and workmates for much loved hand me downs.

Best of luck with your family plans.  A little bit of forward planning can make things smoother.  But even if you have a “Surprise” baby, you can work through the steps above to work out your position and make it work for you.

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