Try creating a passive income stream to help cover regular expenses such as diapers.Maskot/iStockPhoto / Getty Images
Since we had our son, we’ve gained a whole new respect for parents. We used to hike mountains. Now, we wake up exhausted.
It’s especially hard for those with young children to dedicate time to sort their finances. Who has time for spreadsheets when you haven’t slept properly for weeks?
That’s why we encourage parents not to think about family finances as a giant lofty goal but rather a series of small, bite-size tasks that can be done while their little one naps.
Let’s take a relatively small expense that every new parent has to deal with: diapers.
The cost of disposable diapers vary, but right now we’re spending about $40 a month for our two-year-old, which amounts to $480 a year.
Now, $480 a year may not be a ton of money, but it would still be great to cancel that cost out.
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To do this, we need to create a passive income stream equal to the cost of the diapers.
We turned to the Financial Independence, Retire Early lifestyle movement for a lesson in how to do this. We take our annual expense ($480) and multiply it by 25, as per the 4-per-cent rule, which says that one can safely withdraw 4 per cent from your savings each year (keeping up with the rate of inflation).
The 4-per-cent rule was originally meant to calculate retirement portfolios, but why not any other expense? Diapers are just like any reoccurring expense, and we know from retirement planning that if you invest 25 times that annual expense amount, it can support a passive income of 4 per cent of that initial investment.
It’s like planting an orange tree in an orchard (your initial investment), and after every year, you harvest the oranges while keeping the original tree intact.
So, to create our money tree, it will cost $480 x 25 = $12,000. And yes, this does mean that you will need to have this amount of money at hand, but there are a few things to keep in mind.
First, you’re not spending $12,000, you’re investing it. You’re planting your money tree, and after it starts to bear fruit in the form of dividends, interest and harvested capital gains, its pays for your diapers going forward. You’ve essentially planted a diaper tree.
Secondly, the money you were spending on diapers (that $480 a year) is now freed up and can be spent on something else. You could put that money toward toys, formula or even another money tree.
And finally, don’t forget that even though babies only need diapers for the first two to four years of their lives, your money tree keeps producing forever. After that last nappy is used up, you can spend that $480 on whatever you want, forever.
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Here’s another hack that you can use to get your first money tree even faster.
If you order your diapers through an online retailer, some offer a subscription option for a 20-per-cent discount, which, at a $40 subscription, would save $8 a month.
Let’s see the impact that this move will have on the price of your diaper tree.
After the discount, your $40 diapers will cost $32 a month, which adds up to $384 a year. To create a passive income stream worth $384 a year, it will cost $384 x 25 = $9,600.
Compared to the original cost of $12,000, this means you can plant your money tree for $2,400 less than before.
And the best part? Your baby is still using the same brand of diapers as before. Only now, their parents seem a little happier and more relaxed because they’ve done something clever.
Parenting can often feel like putting out a series of fires, only to collapse into bed exhausted so you can wake up and do it all over again.
Having been down this particular rabbit hole (what day is it again?), we know how easy it is to fall into the trap of focusing on the immediate emergencies rather than invest in long-term solutions.
But by focusing on small wins and financially automating certain tasks, such as buying diapers, you will free up a little bit of your mental and financial bandwidth. When you’re a parent, every minute and every dollar matters.
And when you take something off your plate, you can spend that time and money toward something more worthwhile, such as focusing on your relationship with your spouse, or taking a nap.
Kristy Shen and Bryce Leung retired in their 30s and are authors of the new book “Parent Like a Millionaire (Without Being One).”
