It's Business, Baby

September 7, 2012, 1:49 pm Michelle Hutchison Yahoo!7

How mothers can act to protect their personal finances in small business.

It s Business, Baby

If you believe the pundits, taking just two years out of the workforce to have children can leave women up to $50,000 worse off in retirement.

As a working mum, this figure just floored me and got me thinking seriously about the "baby debt" that occurs when we put our careers on hold to have children.

Researchers at Suncorp Life and the Association of Superannuation Funds in Australia, which came up with this figure, based their calculations on a woman aged 32, who takes two years out of the workforce, suspends her normal superannuation contributions and retires at age 65.

Admittedly, the woman in question would need to be earning $115,000 to be $50,000 worse off at retirement. However, for a woman earning $65,000 the "baby debt" at retirement would still be $28,000 and for an income of $85,000 the debt would be $36,500.

For the estimated 900,000 self-employed women in Australia, stopping work to have a baby could wreak havoc on their finances. For instance, will you stop working for a few months or a year and if so, can your business also afford to hire someone to replace you or would the business suffer?

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Your superannuation will likely suffer, but there are a few ways to boost your balance.

The Suncorp researchers found that to make up the deficit, women merely needed to make an additional 1 percent super contribution for every two years out of the workforce, for the rest of their working life.

Meanwhile, the executive director of the Women's Financial Network, Susan Jackson, told Money that another option is for your spouse to make a spouse contribution to your super – and they may even get a tax rebate.

You'll also need to work out how you can survive with less money.

Start by finding out about government assistance. There are benefits and allowances to help with the costs of raising children.

A major concern for most new parents is how they will manage the mortgage repayments when they drop from two incomes to one – even for a short period of time.

Brad Fox, the national president of the Association of Financial Advisers, suggests talking to your lender about switching from principle and interest repayments to interest only, to allow you some breathing room while your cash flow is reduced.

"However, it should only be for a short period," Fox advises. "Treading water is not a good long-term strategy."

A good way to ensure you don’t fall too far behind your repayments while paying interest only is to pay a little extra in advance into your home loan directly (and later redraw on the balance when necessary) or use an offset account as a kind of savings pool.

More from Michelle: 4 Simple Steps to Getting a Grip on Cashflow

By adding just $100 extra to an average-sized mortgage each month, you'll build a tidy amount to redraw down the track. If you can afford to keep it up you could save more than $60,000 over the life of the loan and shave four years off a 30-year term (based on $300,000 mortgage repaid at a rate of 6.5 percent).

Another important consideration is insurance. Life insurance is a must – you will probably have some life insurance in your super fund, so it's worth finding out how much you're covered for. Income protection is equally important, particularly if you're the breadwinner.

Small business owners should also consider key person cover, which as the name suggests, cover an important player in your business such as you or a business partner, for instance.

Finally, before you even fall pregnant aim to get yourself into good financial shape. Give yourself and your business a financial health check to ensure you've got the most suitable financial -products to suit your changing lifestyle.

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Michelle Hutchison from RateCity has joined the KBB expert contributors team and will be bringing you fortnightly news and insights on how to save your business time and money, so keep an eye out!