How to financially prepare for a baby

If you’re expecting, here are some tips that could help you sort your finances before the baby arrives.
Baby holding hand | Wealthify
Reading time: 6 mins

Having a baby is a beautiful, life-changing event. It’s also a huge financial commitment, and if you’re expecting, it could pay off to plan your finances before the arrival of your new family member. Here’s a few tips that could help.

 

Make sure your finances are in shape
If you’re about to have a baby, it’s important to ensure your finances are in order, because once the baby arrives you won’t have much time or energy to go through your ‘to-do’ lists. Needless to say, being a parent is tiring and you’ll want to spend every free minute you get catching up on sleep, not organising your financial life. So, where should you start? Well, it could be worth checking your savings and seeing if you could make further cuts to boost your emergency fund and other savings pots, including any ISAs you may have. Also, don’t forget your will – now that you’re about to have a baby, it could be a good idea to write a will or adjust the one you’ve already prepared.

 

Know what you’re entitled to
If you’re expecting, you can typically receive some financial help from the government – here’s an idea of what you could be entitled to. If you’re planning on taking time off work to look after your baby, you may be eligible for statutory maternity leave and pay – if you’re a man and your partner is expecting, you’ll also be able to claim paid paternity leave. Make sure you check the different rules for taking maternity or paternity leave – you can find all the relevant information on the HMRC website: https://www.gov.uk/maternity-pay-leave & https://www.gov.uk/paternity-pay-leave.

If you’re having your first child and already receive certain benefits, you may be able to claim the Sure Start Maternity Grant. This grant gives a one-off payment of £500 to help you with the costs of having a new-born - here’s more information about it: https://www.gov.uk/sure-start-maternity-grant.

If your child is under 16 and you’re their legal guardian, you should be able to claim Child Benefit. If it’s your first child, then you may be able to receive £21.05 a week. For any additional children, you’ll get £13.95 per week and per child. Child Benefit is usually paid every 4 weeks on a Monday or Tuesday, and payments will typically stop on your child’s 16th birthday. If you or your partner earns over £50,000 a year, you may have to pay back some of your Child Benefit in tax. Child Benefit forms should be completed before your baby is three months old – you can check the government’s website for more information: https://www.gov.uk/child-benefit

 

Plan and budget
Having a baby is a wonderful thing, but it doesn’t come cheap, that’s for sure. According to a recent study, having a new-born could cost as much as £7,200 in the first year – and this estimate excludes childcare1! But don’t worry, there are ways to keep the costs down, all you need to do is plan ahead and set a budget before the baby arrives. One thing you could do is calculate the different costs and find ways to save. Typically, you’ll need to think about clothes, nappies, bedroom furniture, travel equipment, and childcare.

Let’s start with clothes. Since your child will grow fast, try to resist impulse buying and only purchase what’s essential. And don’t forget to ask family and friends for help – most people are more than happy to buy baby clothes for your new addition.

Now nappies! In the first four months, UK parents will spend on average about £189.90 on nappies – and in the first two years, the grand total could reach £793.322. If you want to save money on these, it could be worth looking at offers or invest in cloth nappies that can be washed and reused.

If you’re looking for bedroom furniture and travel equipment, you don’t need to buy the newest items you find in store. If you want to save money, why not look for second-hand items on eBay or Gumtree?

If you need to use childcare, it’ll likely be your biggest expense. If you’re planning on having your child in the nursery full time, you could expect to pay about £242 a week – that’s £968 a month3! So, it’s important to plan as soon as you can. For instance, you could start putting some money aside whilst you’re expecting, and maybe even save the money you get from Child Benefit. It’s also helpful to check whether you’re eligible for any financial support from the government: https://www.gov.uk/help-with-childcare-costs

Once you’ve got all the costs listed, make sure you create a budget before the baby arrives. Obviously, once your child is here, you may need to adjust your budget depending on their needs. But remember planning is key and anticipating your child’s needs could help you prepare their financial lives in the best way possible.

 

Keep an eye on your pensions
Since you’re likely to take some time off from work, you need to make sure you won’t be missing out on any national insurance contributions, or it could have a serious impact on your state pension. If you claim Child Benefit, the government will be aware of your situation and you should keep receiving national insurance credits – this is important because these credits could determine how much state pension you’ll receive and when you’ll receive it. But you will only get these credits under certain conditions, so make sure you check your eligibility before claiming for these. As things currently stand, you’ll need at least 10-years’ worth of contributions to get any state pension, and if you want to receive the full state pension, which is set just over £9,100 a year, you’ll need 35 years’ worth of contributions4. If you’re enrolled in a workplace pension scheme, make sure your employer keeps making contributions whilst you’re on maternity or paternity leave.

What happens once your maternity or paternity leave stops? Well, if you’re planning on going back to work straight after, you won’t have any gap in your pension contributions. However, if you decide to return to work on reduced hours, then your pension may be impacted, and contributions may decrease. If you decide to stay home with your child or become self-employed, you’ll need to make your own pension contributions arrangements and you won’t be able to benefit from employer contributions.

 

Consider investing in your child’s future
Thinking about the near future is great, but it’s also important to consider the long-term. As parents, we all want what’s best for our children. But giving them the brightest possible future isn’t cheap, and it often requires financial planning. If you want your child to live their best life, then consider investing in their future. Most parents will open a savings account for their little one and make monthly contributions to build up a nest egg for their future. In fact, parents in the UK put aside on average £42.45 a month for their child5. Saving is a great way to prepare your child’s future, but if you’re expecting, then you’ve got a bit more time on your side, and it could be worth considering alternative options, like investing. But is it not risky, you ask? Investing does come with risk, as returns aren’t guaranteed and you could end up with less than you initially put in, but it also comes with a chance of higher returns. In fact, the longer you stay invested, the more likely you are to see positive growth and the greater your gains could be. This is because over time your potential profits (or dividends) generate further profits – which is called ‘compounding’. If you want the power of compounding to be effective, you’ll need to let it run through a number of years.

If you want to invest in your child’s future, you could open a Junior Stocks and Shares ISA as soon as they’re born – this type of account comes with many benefits. Firstly, it lets you invest in a tax-friendly way, meaning your child won’t need to pay UK tax on any profits they make, and they’ll be able to keep more of their money. Secondly, it comes with a generous annual allowance of £9,000 (subject to change). Thirdly, everything you put in a Junior ISA is locked away until your child’s 18th birthday and nobody can dip into their savings pot. The money belongs to them, and only them, and once they turn 18, they’ll gain full control over their account.

Opening a Junior Stocks and Shares ISA can feel like a daunting task, but it doesn’t have to be. With robo-investors, like Wealthify, the hard work is done for you. We pick your child’s investments and manage their Plan on an ongoing basis. All you need to do is choose the risk level you are comfortable with and the amount of money you’d like to invest. It doesn’t have to be big lump sums. It’s possible to build a decent nest egg for your kid even by investing little and often. Say, you open a Wealthify Junior ISA on the day your baby is born and invest £50 a month. On their 18th birthday, your child could get around £14,967, which could either help them get their first home or pay some of their university expenses6.

References: 

1: https://partner-tools.moneyadviceservice.org.uk/baby_cost_calculator_syndicated/index.html

2: http://www.whatprice.co.uk/health/parent/nappies.html#axzz6MmpmfFX1

3: https://www.moneyadviceservice.org.uk/en/articles/childcare-costs

4: https://www.gov.uk/new-state-pension/what-youll-get

5: https://www.moneyadviceservice.org.uk/en/articles/childrens-savings-options

6: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £11,653. If markets perform better, your return could be £19,059. Values correct as of 18/05/20.

 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

 

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

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