Thursday 9 May 2019 7:30 am

Expensive business: Five ways to prepare your finances for your first child

It has arrived. And I’m not just talking about the royal baby, but the mania – the 23-page newspaper spreads, the bets on baby names (Archie was definitely not the bookies’ favourite), the frenzy over the first glimpse of the little sprog.

I don’t want to put a downer on all the celebrations, but babies aren’t cheap.

According to the Child Poverty Action Group, the average cost of your first child is a tantrum-inducing £8,418 per year. Over the course of 18 years, costs amount to £151,529.

And unfortunately, most of us don’t have the kind of gold-plated, diamond-encrusted finances that come with being seventh in line to the throne.

“Planning for a new baby is wonderful and exciting, but the hard truth is having babies costs money,” says Becky O’Connor, personal finance specialist for Royal London.

“The financial strain for many couples who start a family comes from the ‘concertina effect’ of a rise in outgoings, as well as a drop in income, as one or both partners takes leave on reduced pay, and then – as is often the case – chooses to go part-time.”

So if you’re about to have your first baby, how should you prepare your finances?

Pregnant pause

Assuming that you’ve already told your employer that you’re expecting, find out what support and benefits your company offers new parents.

Jeanette Makings, head of financial education at Close Brothers, says you should speak to your HR team to understand your employer’s maternity and paternity policies – this is a good starting point to gauge how you will be affected financially once your baby is born.

Makings suggests you should find out whether you can share some of your leave with your partner, and whether there would be any circumstances in which you would need to repay any of your parental rewards (such as if you decide not to return to work).

Another question worth raising is what happens to your pension during parental leave. Some employers will continue to contribute into your workplace pension while you’re on leave, but if they don’t, Makings advises that you should consider if you can make up contributions when you go back to work.

Also, make sure that you claim child benefits (even if you’re a high-rate taxpayer), because stay-at-home parents who don’t register can end up losing the National Insurance credits needed to qualify for state pension, and this can be costly later in life.

Read more: Fail to claim child benefits and you could lose thousands in pension money

Some workplaces offer other support, such as childcare vouchers or creche facilities for when you return to work, so find out whether any schemes are available.

Baby steps

You may well want to share baby care with your partner, but first you’ll need to work out whether it is cost-effective based on the paternity or maternity pay on offer, says O’Connor, pointing out that pay varies dramatically from employer to employer.

Based on this, she sensibly advises that you should work out what your income will be for the whole of the first year of your child’s life.

“Add up your total joint net pay for the year and divide it by 12 to give a rough monthly budget for the first year. This will prevent you overspending when your baby is little and running out of cash later in the year.”

This will also reduce the likelihood of you having to go back to work earlier than you want to because you need the money towards the end of the first year, missing out on valuable time at the start of your child’s life.

Labour pains

Depending on what your employer is offering in terms of maternity or paternity pay, it’s likely that you will have to plan ahead for a period of lower income.

“Go back to the drawing board on your family finances,” says Makings.

In order to figure out what is realistic and affordable, look at how you fare financially on a reduced household income after essential spending has been taken into account.

Of course, increased costs with a new baby are inevitable, and as Makings points out, costs are unlikely to come in nice even monthly chunks. “Remember that some costs are one-offs, such as nursery equipment, a pram, and a car seat. Other costs will be regular and ongoing, such as nappies, clothes, and food.”

She also warns that some costs are less obvious, but should still be factored into your budget, such as visits to soft play areas, the zoo, or parent and baby activity classes.

Pregnancy pillow

Around half of parents don’t have a plan in place in case the main breadwinner loses their income due to illness, with just 12 per cent covered by an income protection policy, according to a study of 1,000 people by insurer LV.

A sudden loss of income can have a massive impact on family finances, so consider getting income protection insurance, which would provide you with a financial safety net if anything unfortunate happens to you or your partner.

There are also other ways to give yourself a financial buffer in case anything unexpected were to happen. The most obvious way is to build up your savings before you start thinking about expanding your family.

As O’Connor says: “If you are managing well on two full-time incomes before your baby comes along, and you think that there’s room to save a bit more, do it. Having a cushion to dip into will be a blessing later on.”

She also suggests trying to avoid over-spending on things you might not need before your little one arrives.

“It’s surprising how little you really need in the early days. And babies grow quickly, so don’t waste money by spending on new clothes – and accept hand-me-downs.”

Also remember that some things are free for pregnant women, such as dental care and prescriptions.

Sweet childcare of mine

When you near the end of your parental leave, you might consider going back to work. But of course, that means you have to take into account the cost of childcare, which is notoriously expensive in the UK.

The average cost of sending a child under two years old to nursery in the UK is £127 per week part-time (25 hours), and £242 per week full-time (50 hours), according to the Money Advice Service.

With this in mind, it’s not surprising that many parents decide that it doesn’t make financial sense for them to go back to work immediately.

“When considering returning to work, revisit your budget,” says Makings, pointing out that this calculation is particularly relevant for anyone considering returning to work part-time. “Talk to your payroll colleagues to assess any impact on your tax code where you have had a period of no pay. Also understand your employer’s position on emergency care leave and parental leave.”

Your newborn might not be a privileged member of the royal family, but you don’t need that kind of cash to give your child a happy future.

Even a small amount of financial preparation can go a long way. And by avoiding money worries, it means you can focus on your baby’s first years.