23rd November 2023
general
You not only need think about the day to day costs of caring for a child, but also the longer term effects. Can you still afford to save for retirement? Would your family be able to cope financially in a worst-case scenario? How will your goals and priorities change now that you have a family to consider?
Below, we consider these points and offer some financial planning tips for new parents.
Budget Carefully
Depending on the source, you may have heard that raising a child from birth to 18 costs, on average, anything up to £250,000. This amounts to almost £14,000 per year, before you even enter into the world of university costs, cars, and first home deposits.
This figure may seem terrifying, but remember, this is based on average spending, not the essential costs of parenting. The amount spent on education, housing, childcare, and leisure activities will depend entirely on your family’s budget and requirements. It also doesn’t take into account any help received from family or state benefits. If everyone needed to pay over £1,000 per month out of pocket to raise a child, the population would be much smaller.
Babies and children probably don’t need as much as you think, and much of the equipment and clothing can be bought second-hand or in the sales. They can also usually be sold on if they are in reasonable condition. Free activities and special deals are everywhere – it’s worth joining local groups (in person or online) to find out where to look.
The teenage years can get expensive, but it’s important to teach your child the value of money. Encourage them to save for important goals and to help around the house for extra cash.
Make Sure You Are Protected
Having a family means that more people are dependent on you. This may be because you are the main breadwinner and your family rely on you for financial security. It might also be because you deal with the majority of childcare and running of the household – these might not be paid roles, but there would be a cost if you could no longer fulfil them.
All parents should make sure they have the following in place:
While we can’t plan for every scenario, having the above in place means that your family won’t need to worry about money even if things go wrong.
Save for Their Future (And Your Own)
Everyone wants to make sure their children have the best start in life. The cost of living is rising all the time and it is more difficult than ever to get on the property ladder. By making some provisions when your children are young, you can give them a head start on important financial milestones.
The easiest way to save for children is by setting up a Junior ISA. You (or someone else, e.g. a grandparent) can save up to £9,000 per year, per child. All income and growth are tax-free. The money can be held in cash or invested in stocks and shares. At age 18, the child can either withdraw the money or roll it over into an adult ISA. A Junior ISA is a good way to teach children about finance and investments. Of course, a potential downside is that they will have full control of the money at age 18.
You can also pay up to £2,880 per year into a pension for a child. With tax relief, this is grossed up to £3,600. If this is maintained and compounded over 60 years or so, it could make your child a millionaire by the time they retire.
Another option is to set up a trust. As there are costs and tax complexity involved, this is usually only worthwhile for larger amounts. A trust allows you to keep control over who receives the money and when, as well as protecting the assets in the event of bankruptcy or divorce. It’s a good idea to seek advice if you are thinking about setting up a trust.
While it’s satisfying to be able to provide a financial cushion for your child, it’s important to consider your own needs. Make sure your own retirement and important financial goals are on track before you think about how much to set aside for your children.
Plan for Returning to Work
Many parents work full-time, but the cost of childcare is a significant barrier for lower and medium earners.
Of course, there are alternatives to full-time childcare, such as family help or flexible working. Once your child starts nursery (and then school) the costs will reduce substantially.
If your child is over 3, you may be eligible for up to 30 hours of free childcare. This is due to be extended to all children under 5 by September 2025.
Universal credit could be another option – you can reclaim up to 85% of your childcare costs if you meet the qualifying criteria.
Tax free childcare can also help with the costs if you are working at least 16 hours per week and earn under £100,000. It can’t be used if you are claiming universal credit.
Many parents feel that the cost of childcare outweighs the benefits of returning to work, and decide to stay at home for a few years. While this can benefit the child and the parent, remember, you may miss out on career progression as well as pension contributions. This does not mean you should not stay at home, but that you should build this into your financial plans.
Please don’t hesitate to contact a member of the team to find out more about financial planning.
