If you are planning to start a family, it's important to prepare your finances as well as everything else, to lessen the risk of money pressures later. Your day-to-day costs will rise, while investing and saving for the long time should never be neglected.
No two families have the exact same amount of costs and what your own will be depends on a number of variables, including whether you want to educate your children privately or help with the costs of university later on.
Child Poverty Action Group estimates that the cost of raising a child from birth to age 18 is £160,692 for a family with two parents or, on average, £8,927 a year. "But these figures do not include university tuition or private school fees, with the largest single contributor coming from childcare followed by food," says Emma Parkes, relationship manager at Church House Investment Management. "Add in university and day school fees, and the total could easily rise by £100,000."
Not all of these costs will accrue at the start of your child's life so first think about the immediate spending priorities – what you will need to buy before the birth and shortly after. "There are a few consistencies in terms of what one spends – such as nursery furniture, a pram and car seat," says Jason Barefoot, chartered financial planner at Ascot Lloyd. "And day-to-day costs add up over time".
However, if family and friends are giving you baby equipment or helping you cover the cost of it your expenses could be less. Government government-backed financial guidance website MoneyHelper has a baby costs calculator to help work out the budget for the birth of your child at https://www.moneyhelper.org.uk/en/family-and-care/becoming-a-parent/baby-costs-calculator. This lists a number of essential items you may or may not wish to include to help you build up an idea of what you need.
A key cost factor is whether or not you will need childcare and for how long. Coram Family and Childcare's annual Childcare Survey found that in 2021 a part time nursery place for a child under two costs £138 per week, on average, or over £7,000 per year. But there is substantial variation in childcare costs across the regions, with the highest costs in inner London at £179.86 per week for a part time nursery place for a child under two – 57 per cent higher than the lowest average costs in Wales of £114.76 per week.
Also factor in a loss of earnings from maternity leave or time away from work if this is relevant.
As well as the costs associated with the child, consider whether you might want to move to a larger home in future and where, for example, if you want to move into a catchment area for a good school.
Atticus Kidd, wealth planner at JM Finn, also suggests speaking with friends and colleagues who have children to get an understanding of family finances. "It can often be easy to underestimate the costs of key elements such as childcare," he says.
Raising and preparing your finances
Barefoot suggests drawing up a net worth statement showing all your assets to liabilities, and a personal profit and loss statement that shows income and expenses. "This is the base to any planning discussion," he says. "You know what capital and surplus income you have available to put towards your objective."
You should start saving as soon as possible for having a family. "Once you know the inflation adjusted costs and timeframe [in which] the funds will be needed, you can use a range of assumptions around investment returns/interest to account for how much inflation adjusted savings per month you need to save," he says. "A time value for money calculator could do this for you."
Zoe Dagless, senior financial planner at Vanguard, says that you could set your regular contributions to increase automatically by a certain percentage every year. "This strategy can help you adjust for inflation and future pay increases," she explains.
If you are not currently saving enough each month to meet your target within your timeframe, you may need to prioritise your expenditure, cutting back on what you don't need or is not as important to you. "Align your money to your values and consider if each expense meets those values," suggests Barefoot. "Be cut-throat: if it does, stick with it, but if not then get rid of it."
Dagless suggests analysing "why you are paying for certain things or query whether you are on the best deals for things such as mobile phone bills".
Don't sacrifice important things such as workplace pension contributions. “If reducing your contributions would lead to a reduction in those provided by your employer, it's a double whammy of lost future income," warns Barefoot. "If, however, you're paying a larger amount than you need to get your employer’s maximum contribution and would continue to benefit from its maximum contribution after a reduction in your contribution, there is scope to reduce it if saving for a family is a higher priority and there aren't other expenses that could easily be reduced."
Dagless also suggests paying off any high cost debt such as credit cards. "You should choose the debt with the highest interest rate to start paying off first as this will save you money in the long run," she says.
Other options could include your parents – the future child's grandparents – or other relatives helping to meet shortfalls. Each grandparent can make gifts of £3,000 a year inheritance tax (IHT) free, and could make further tax free gifts of any amount out of surplus income. If the further gift is not out of surplus income, if they live for seven years after making it, it is IHT-free.
How to save and invest
The types of account in which you hold the money you are saving for your child and the assets in which you hold it depend on your timeframe. If you need to draw on the money within five years it is best to hold it in cash accounts covered by the Financial Services Compensation Scheme (FSCS) which pay the highest interest rates, and move the money around to keep accessing the best rates. Also do not put more than more than £85,000 per person in one bank or building society because the FSCS would not cover more than this if that institution fails.
If you have a longer timeframe you should invest the money, ideally within stocks and shares individual savings accounts (Isas), to ensure maximum tax efficiency, as you do not pay tax on the interest or investment returns you earn within them. Also look to keep the fees of the investments you hold at a minimum, especially over longer investment periods, as higher fees eat up a considerable amount of your returns.
Barefoot suggests investing the money in a global equity fund. Options include Rathbone Global Opportunities (GB00BH0P2M97), which offers exposure to a good range of developed markets equities, albeit with a US bias because that is where its managers currently believe that the best growth opportunities are. It has an ongoing charge of 0.51 per cent or 0.77 per cent, depending on which share class your investment platform offers.
Passive funds have even lower charges and options include HSBC MSCI World UCITS ETF (HMWO), which has an ongoing charge of 0.15 per cent. It tracks MSCI World index and has around 1,400 holdings listed in a range of different countries in different sectors. But it also was largely accounted for by US equities and had relatively large allocations to US tech stocks at the end of July.
You should also have an emergency fund in easily accessible cash to help cover any unexpected expenditure. "As a rule of thumb this should represent at least three to six months of your expenditure, but you may wish to allow for additional wiggle room as you get comfortable with your new level of expenses when starting a family," advises Kidd.
After the birth
If you plan to help your children cover the costs of university, the earlier you start saving the better.
University fees for students cost around £9,250 per year and, according to Dagless, students can expect to pay at least £5,000 a year for accommodation, if they live away from home, and a similar amount for other living expenses. However, this varies depending where the course is, and all students can take out a loan to cover tuition fees and some qualify for maintenance grants to help cover living expenses.
Barefoot estimates that the average cost of going to university outside London today is in total £41,322, but to get an estimate of what it might cost when your child starts university adjust this according to RPI inflation. Although this is currently at 12.3 per cent this high level may not endure so it as this cost is further ahead keep revisiting your estimates.
"For example, if university costs £41,322 today, in 15 years at 2.5 per cent inflation, it'll cost £59,847," says Barefoot. "Assuming net returns of 3.5 per cent per year and a starting balance of nil, you’ll need to save £253.69 per month to achieve this figure at that point."
If you cannot manage to save that much, if you invested £100 a month for 18 years and had an average annual growth rate of 4 per cent, compounded, that would grow to around £30,000 by the time the child is age 18, suggests Dagless.
If you have used up the capacity in your own Isas, you could save towards your children’s university costs within a Junior Isa (Jisa). You can save up to £9,000 a year into this kind of account on behalf of your child and the money in these cannot be accessed until the child in whose name it has been opened turns 18. So Jisas can be a good way to grow money for university or other goals at that age and beyond. However, the child gets access to the assets in the Jisa at that age so there is the risk that they will not use the money as you intended.
Therefore if you and your spouse have not used up your own Isa allowances for your saving, or costs relating to your child before the age of 18, it could make sense to first invest for your children within these and then put any further savings into Jisas for expenses that your child will not incur before age 18.
With a time horizon of 18 years you should invest the money rather than hold it in cash, and a good way to start off is a global equities fund with reasonable fees.
