How can you prepare finances for a baby?
John Lennon’s Beautiful Boy tells us ‘life is what happens to you while you’re busy making other plans’.
There’s probably some truth to this. There’s never a perfect moment financially to have a child, and if you’re waiting for this moment to arrive, you’ll be waiting an eternity.
Oh, and whenever you do so, you’re going to be lighter in the wallet, but perhaps richer in the soul. That’s just an immutable truth.
Below are a few steps I found useful to prepare finances for a baby in the months leading up to parenthood, and the first few afterwards:-
Baby aside, sound financial planning dictates you should have at least three month’s essential living expenses – preferably six! – set aside in cash you can lay your hands on in a hurry. If you haven’t achieved this buffer prior to your baby arriving, work hard to do so – you’ll sleep a lot better at night knowing you’ve got a three-month grace period before the brown stuff hits the fan. Suffice to say, you’ll sleep even better with six!
Essential living expenses include:-
- Internet/phone line
- Mobile phone contract
- Utilities (water, gas and electricity)
- Car insurance
- House insurance
- Council tax
Basically, the stuff you – and your expanding family! – need on a monthly basis to keep a warm roof over your head, food and water in your belly and a car on the road. It’s important you keep this buffer in cash, rather than invested in stocks and shares in an ISA, for example. You need to imagine being made redundant today with a rent payment due tomorrow. If you’re worried about the value of your cash being eroded by inflation, keep it in Santander’s 123 account, which offers you 1.5% interest on balances up to £20,000, plus up to 3% cash back on certain direct debits.
2. Budget Hard and Cut Waste
Thought budgeting was just for the socially awkward accountant at work? No longer. Wave goodbye, at least temporarily, to two full-time salaries and oodles of disposable income as you prepare your finances for a baby.
I’m notoriously tight-fisted, but even I was shocked when I got my head under the bonnet of our finances and examined every penny that was leaking out of our current account like a rusty bucket riddled with holes. It’s amazing the amounts you can save when you apply yourself.
Here’s some of the waste, and largesse, I unearthed:-
- Two music streaming subscriptions. If you subscribe to Amazon Prime, which includes a perfectly good music streaming service, do you really need Spotify?
- Same goes for TV streaming – do you really need NOW TV, Netflix, Amazon Prime and Sky TV? Pick the one or two with the content you love.
- If you lease a car, consider buying without finance. You probably only need to own the car for a year to be in positive territory financially. If you have a bit of spare cash knocking around, spending some now to save yourself a monthly ongoing cost is wise. It’s almost certain your monthly income will drop when the baby arrives.
- Ensure you’re on the cheapest energy tariff possible. Money Saving Expert’s Cheap Energy Club is a good place to address this.
- While you’re at it, renegotiate every contract you have downwards. Mobile phone contracts, car insurance, house insurance, phone line, internet connection etc. There’s scope for you to pay less for all of these. Don’t accept no for an answer. Most companies would prefer to keep your business, albeit on reduced terms, than watch you welcomed into a competitor’s arms.
- Review all luxuries in the cold light of day, especially those with an associated monthly subscription. I belonged to a £20 a month wine club, a £10 a month shaving club, a £20 a month banking service and a £10 a month Audiobook service. I had more wine than a Charlie Sheen NYE party, and enough post-shave moisturiser to keep Schwarzenegger oiled in his heyday.
This is by no means an exhaustive list. Look at the past six month’s bank statements and list every ongoing cost, and address each in turn. Going through this process allowed me to cut hundreds of pounds from our household’s monthly costs. In fact, we cut so much, we financially stood still when my wife commenced maternity leave.
Once you’ve cut your ongoing costs down as far as you can, create a budget for the first year of the life of the baby. This is likely to cover the period of time when you, your partner or both of you will be earning less. The Escape Artist has an excellent spending tracker that can be downloaded here, under the Track Your Spending section.
You obviously need to ensure you at least break even each month, and preferably post a surplus. As part of this, you’ll need to work out how much maternity/paternity pay you’re owed over the year from the state and your employers.
3. Get Life Insurance and a Will, and Appoint Legal Guardians
If part of a couple, both probably feature pretty low on your ‘to do’ list. But if the unthinkable happens to either one or both of you, you need to ensure your child is cared and provisioned for until adulthood.
A relatively cheap life insurance policy is a good idea if you own a house with an outstanding mortgage. If either you or your partner were to die, the insurance will cover your mortgage payments for the remainder of the mortgage. My policy is £9 a month, which is a small price to pay to know the mortgage payments will be taken care.
I’m not a legal expert, and my own circumstances are quite straightforward as part of a married couple. But whatever your circumstances, a Will of some description is a necessity. Your options are either to approach a family lawyer who will advise you and produce a Will at a cost of a few hundred pounds. Personally, I opted for Law Pack’s DIY Kit as I was confident my own circumstances were uncomplicated.
The good thing about this kit is it also includes the appointment of legal guardians in the eventuality both parents die. Legal guardians are responsible for your child’s care until adulthood in your absence. If the worse happens and you don’t appoint one, the courts will, and they may not pick who you might have.
It’s a bit of a minefield picking a guardian, so deserves its own blog in due course, but suffice to say, it’s a decision worth getting right, and reviewing from time-to-time as circumstances change.
4. Don’t Overspend on Baby Stuff
A newborn baby, up to roughly six months of age, actually needs very little. Assuming breastfeeding is established, food is free, plentiful and highly nutritious. Any clothes/baby grows you put them in will almost immediately be ruined by a coating of sick, urine and faeces. They initially sleep in a Moses basket in the same room as you – we picked one of these up in a local Facebook group for second-hand equipment.
Most items you buy or are purchased for you, are done so for the purchaser’s gratification and not for the baby. There’s not necessarily anything wrong with this, as a new baby is a cause for excitement and celebration. But there’s certainly no need to go overboard.
Your biggest expense should be a good travel system, nearly everything else can wait. Plus, you’ll be completely blown away by the generosity of others who’ll fall over themselves to give you clothes and toys!
5. Invest in Their Future
In addition to baby grows and garish toys, friends and family are likely to gift you cash for your child.
Instead of a bank account, where the value of any money is constantly eroded by inflation, we chose to set our child up with a Junior ISA where any cash gifted is invested for the long-term. With the benefit of compound interest, even relatively modest amounts can snowball into a tidy fund available to your child when they turn 18, just in time for University costs or a deposit on a house, for example.
Providers include Hargreaves Lansdown and Vanguard. If you’re able to make a modest contribution into this ISA from time-to-time, in addition to anything extra they might receive at birthdays etc, the rising tide of the stock market will take care of everything else.
Use this calculator to give you an idea of how much your child might receive after 18 years of modest contributions.