3 min read
Becoming a parent for the first time is exciting, unpredictable, and maybe a little daunting. Suddenly, you are not only responsible for yourself, but another person who depends on you for everything. It may also trigger a review of your current financial position.
1. Identify your financial goals
For most new parents, focusing on the big picture isn’t easy. You may be sleep-deprived, juggling naps and feeding schedules, and excited about the new little person in your life. But now is the time to start focusing on your baby and their financial future.
Understandably, most new parents may find their own goals change with the arrival of a newborn, and it’s important to get a sense of what you are working toward both in the near term and long term; the key is to prioritise.
Whatever financial planning action you decide upon, the best course is to do what you can comfortably afford to plan for. This may mean temporarily putting some other priorities on the back burner as opposed to stretching yourself.
Looking to the future you may want to support your child’s education or a first car, a wedding or house deposit. That’s why it’s important to look at setting yourself some financial goals and get into the habit of saving and investing for them now.
2. Make a budget and track spending
With a new child comes new expenses. When you find out you’re expecting or if you have a newborn, your focus should now turn to putting your financial house in order too. A good starting point is to draw up a budget to reflect any new or additional expenses you may now incur, alongside your current incomings and outgoings.
Understanding what you may receive from an employer in terms of any maternity/paternity package you may qualify for, will also provide you with the opportunity to include that in any budgeting decisions you may make. Employers have various obligations towards employees who are pregnant, have had a new baby (including by surrogacy and adoption), or need time off to care for their baby or older child. These obligations give important protections to employees through a range of different parental rights. These rights extend to gender diverse parents, same-sex partners, and civil partners, not only heterosexual and married couples.
Does your employer offer enhanced pay, or will you receive the statutory amount? Will there be a short-term reduction in your pay during maternity/paternity leave, should you set money aside to account for this? Knowing what you can expect to receive as part of your package, will mean you can plan confidently.
It is also important to note that you need not be the father or male to take advantage of paternity leave – you need only be the partner of the birth mother, an adopter or the intended parent of the child.
Tracking your spending will help you to determine whether your money is going toward the things you really care about. It also gives you the information you need to make decisions about your family finances moving forward.
Another consideration for managing your budget, is around childcare costs. Whilst this might be for a little further down the line, understanding what these costs may be could influence any choices you need to make around flexible work arrangements, and whether you would need to return to work on a part time or full-time basis.
You may also be entitled to tax free childcare or child benefit payments. For further information on both these schemes, you can refer to https://www.gov.uk/tax-free-childcare and https://www.gov.uk/child-benefit
If you find you can’t keep to the budget on the first or second try, don’t give up, adjust your budget until you come up with one that works for your family. Budgeting will be an ongoing process as your situation changes over time.
It’s important to consider at this point if you are planning to reduce or stop any investments or savings, as this may impact both you and your child’s financial future. Instead, take a look at your budget and see where you could make changes which could allow you to continue to do this.
3. Set up an emergency cash fund
Life can be uncertain so you should try to have a contingency plan for those situations where you, your partner, or both of you may be unable to work, or face an emergency and need additional funds.
An emergency fund will provide a comfortable cushion for you as a new parent while searching for a job if you are made redundant or whilst recovering from a period of ill health. This should be calculated based on your new family budget. An emergency fund is also especially important if your family is reliant on a single family member’s income.
Putting aside 3-6 months’ worth of expenses is a good rule of thumb and have this in an account which is easily accessible.
4. Invest in your child's future
With the arrival of your new baby, you may start thinking about investing for your child’s future, for say, their education or first house deposit. If finances permit, now is the time to start investing regularly and allocating money towards investments that could give them tangible support when the time comes.
It might seem bizarre to think of your newborn child drawing a pension, but with a relatively small investment now you could provide a gift for their future. Thanks to generous tax relief on pension contributions, parents can set up Junior Pensions for children and currently contribute up to £2,880 a year topped up by the government by £720 (tax relief at the basic rate of Income Tax at 20%), into a pension for each of their minor children (aged under 18). Once the Junior Pension is set up, other relatives such as grandparents, great-grandparents and even friends can pay money into the pension as long as the combined annual contributions do not exceed £2,880 net (£3,600 gross) per child per annum.
If you arrange a Junior Pension for your non-earning child, you can pay the maximum amount into it until the child reaches the age of 18. The earliest retirement age is currently 55 and it will rise to 57 from 2028.
You could also start saving or investing into a Junior Individual Savings Account (JISA). Only parents and legal guardians can open these tax-efficient accounts for the under-18s, although anyone can pay into it. The total amount paid in cannot exceed £9,000 in the current tax year, and your child cannot withdraw the money until they are 18, though they can run the account from age 16.
5. Make sure you have life insurance
Becoming a parent prompts many people to review their life insurance arrangements. It’s important that you think about the reasons and scenarios that may arise. For example, should a stay-at-home parent also have life insurance? In their absence it’s likely a surviving partner could incur costs, for things like childcare, something you’ve not had to consider before.
If something should happen to you, depending on your specific life insurance policy, it could provide financial support toward your family’s needs. Whole life insurance provides coverage for up to your entire life and term life insurance provides you with coverage for a fixed length of time.
Your financial and family situation will determine whether you need life insurance, and if so, how much coverage you should have. You should ensure any life insurance policy you do take out is right for your personal situation.
Finally, as part of protecting your new family member don’t forget to either review an existing Will or make a Will. This allows you to name a guardian (and contingent guardians) to care for your minor child (or children) if you and your partner both die unexpectedly. You can also name a trustee to oversee any assets placed in trust for your minor children.
Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The content of this article was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.
This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.
The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.
Please note, The Financial Conduct Authority does not regulate advice on Will writing.
You should seek legal advice to ensure that your Will reflects your wishes and is legally binding.