Revealing the golden rules for family finances: Sarah Coles
We’re knee deep in peak births season, with the lion’s share of the most common birthdays falling in the second half of September.
September 26 is the key date for births, and while a romantic might point out this essentially means conception during the festive period, and a peak on Boxing Day, a cynic might suggest parents are keen for their children to be among the oldest in the school year – which statistically is most likely to lead them to better results at school.
Whatever the reason, if you, or someone you know, is welcoming a new human to the world, it’s going to come as no comfort at all to know that over the next 18 years it’s going to add an eye-watering £119,600 to your spending. This isn’t the total cost of what parents spend on their children, because it also factors in the financial sacrifices they have to make along the way. It means they spend less on the nice-to-haves and yet still their financial resilience has taken a battering.
New figures from the HL Savings and Resilience Barometer mean we can compare the spending of an average couple with no children with the average spending of a couple with kids. Overall, couples with children actually spend less on food and drink than those without – despite having extra mouths to feed.
They also spend less on alcohol and tobacco, household goods and services and less on essential travel. Even in areas where they have to fork out more, in some cases the difference is only fractional.
So, for example, they spend just £71 more on clothes each year than couples – sacrificing fashion for growing children and £53 a year less on restaurants and hotels – going away and eating out far less in order to cover the cost of more people.
But there are only so many spending cuts they can make. It means that despite all the sacrifices, this year they’re spending £5,108 more than couples without kids. With inflation at three per cent, the first 18 years of your child’s life could mean forking out just under £120,000. As a result, children take a toll on all sorts of areas of your finances.
The amount of money that parents have at the end of the month is particularly striking. A couple with kids has an average of £154 left after paying the bills, while a couple without children has £559.
That’s bad enough, but because they spend more on the essentials, they need more left over in order to be considered resilient, which is why only three per cent of couples with children have enough cash left at the end of the month to be resilient, compared to 62 per cent of those without.
Running so close to the edge means parental couples are struggling to build for the future, including emergency savings. Fewer than half of couples with children have the recommended minimum of at least three months’ worth of essential spending in an easy access account to protect them from the unexpected. This compares to almost three quarters of couples without kids.
It's a fairly bleak picture for parents, but there are some golden rules that can help your finances weather the difficult and expensive years of parenting.
Plan ahead
It’s always cheaper to plan ahead and save for something than it is to try to make ends meet as you go along – or borrow and pay interest. From the outset, before you have children, it’s worth getting into the best possible financial position before you start.
You’re going to need to draw up a tighter budget when the child is born, so why not do it as soon as you start planning for a family?
You can use the cash you free up to pay down expensive short-term debts and build up any savings you can.
This isn’t going to feel like enormously helpful advice if you’re already a parent, but it applies for any big expense or financial milestone. The further ahead you can plan, the easier it is to factor into your budget, because the more you can spread the cost. If you can plan at least 5-10 years down the line, it means you may be able to invest, which offers far more potential growth than saving, and can do some of the heavy lifting for you in reaching your goals. For the really pricey stages in life, like moving out or studying, planning ahead can make all the difference.
Don’t overlook your own needs
Children can easily soak up all the cash available. It can be difficult for parents to prioritise themselves, but it’s vital to keep your own needs in mind too. If you put your savings and long-term investments on hold, you’ll have an enormous amount of ground to make up later – particularly when it comes to pensions.
Where one parent works part time for a longer period, there’s a risk they have a long break from paying into a pension, which can have serious repercussions for their retirement income. Some parents will choose to make extra contributions into the pension of the person working full time to make up for it, but it’s worth understanding the implications of that – particularly for unmarried parents. It makes sense to consider your household finances in the round, and talk about ways you can free up cash so you can both pay into a pension or SIPP if possible.
When it comes to investments, we often find parents will consider investing for their children before they make a start on their own pots. Just over half of HL Junior ISAs are the first HL investments in the household. When people have children, they’re laser-focused on doing the right thing for them, and building for their future security and opportunity, but parents need to have the same ambition for themselves.
Don’t be afraid to ask for help
When the children are young, one of the biggest differences grandparents can offer is help with childcare. It doesn’t have to be a one-way street either, because if they’re under state pension age, looking after a child under 12, and have fewer than 35 years of National Insurance contributions, they may be able to boost their state pension at the same time with NI credits.
In the first expensive years of life, it can also be difficult for parents to free up money for their child’s future. If that’s the case, grandparents may be prepared to step in, and pay into a Junior ISA. Your offspring never stop being expensive, and at 18 they may need a lump sum for one-off expenses like a car or property deposit, or support through university. The proceeds of a JISA can be invaluable at this stage.
Guarantees are our top priority
In a survey we asked people what their top priority was when it came to their retirement income, and overwhelmingly the most popular answer was a guaranteed income. Two thirds of people picked this over beating inflation, having flexibility to take more income when they need it, or having the opportunity for their pension pot to keep growing. It’s one reason why annuities are enjoying a resurgence in popularity, especially now that annuity incomes are higher.