The Best Thing To Do Before You Have Kids

Ah, children. One of the most rewarding parts of life, whilst also being one of the most stressful, challenging, and let’s be really honest, expensive! The true cost of having children can be a shock to new parents, and many of these costs are not immediately obvious.

Like any large financial commitment, the better you can plan ahead for it, the less of an impact it will have. It can be an anxious time becoming a new parent, and if you can remove some of the concerns and worries around money, it will give you more time to worry about everything else!

In all seriousness, removing or limiting money worries is one of the best things you can do for a growing family. With a lack of sleep and so many new skills to learn, the last thing you want to be worried about is whether you can afford certain things or how quickly you need to get back to work.

In this article, we’ll cover some of the broad costs involved with raising children, as well as how you can plan ahead to allow you to focus on the fun and rewarding aspects of raising your children.

How Much Do Kids Cost?

Let’s get into the numbers.

According to the Child Poverty Action Group, the bare minimum required to raise a child is around £9,000 per year, but that’s not a luxury upbringing by any means. This research is based on the minimum required amount in order to meet a child’s basic needs. Understandably, most parents will want to provide much more than the minimum for their children, which means the costs can go up significantly. 

The basics such as food and clothing will be higher based on the current family lifestyle and the social norms for the people the kids will spend time with. 

The family will need bigger cars, which are always more expensive, but the difference is wider when you’re used to driving luxury vehicles rather than a basic runabout. For example, an upgrade from a BMW 3 Series (around £40,000) to a family-friendly BMW X5 (around £85,000) isn’t an insignificant cost.

As well as the initial outlay, running costs will go up too, with the X5 likely to cost up to £8,000 more than the 3 series on a yearly basis.

Holidays will be a lot more expensive as well, with extra plane tickets, hotel rooms and activities needing to be paid for. Not to mention paying for childcare while you’re away.

Speaking of childcare, the costs here can vary widely. Full time nursery or daycare can cost between £2,000 - £2,500 each month and a Nanny in London is likely to cost between £45,000 - £55,000 a year, depending on whether they’re live in or live out. Once the kids are old enough for school, a private education can hit £30,000 a year for day students and £45,000 or more for boarding school.

So yes, in terms of cash out the door, kids are expensive. But what about the less clear-cut costs involved with having children?

What are the Other Financial Impacts of Children?

Some of the costs of raising children are less obvious.

Firstly, there’s the need to upgrade or upsize items and assets that you already have. We’ve mentioned cars already, but your family home is another big one. Not only will you need a larger property than you’d need for just yourselves, but things like school zones or access to facilities for the children, make areas more desirable for families which can further drive up the prices.

With a bigger house comes higher council tax, higher utility bills and in general just greater running costs for the house.

For example, a young couple in London may have a 2 bedroom flat worth £800,000 and spend around £600 per month on their grocery bill. In order to move to a 4 bedroom house with a garden, that property value shoots up to £1.5 million and the grocery bill gets a £400 per month hike.

In other parts of the country the property figures won’t be quite so high, but from a percentage standpoint the difference is likely to be similar.

There’s also things like insurance. You may not have considered life insurance before you had children, but with a family to support it’s a really important factor to consider. Policies such as term life and critical illness are must-haves for new parents. If you weren’t here anymore, how would the family afford their lifestyle

Let’s quickly summarise some of these costs:

* A common rule of thumb is that the ongoing cost to maintain a property is 1% of its value. This won’t be true every year, but some years come with big lump sum costs to even out the low cost years.

Obviously this list isn’t exhaustive, but it should start to give you an idea of the type of financial commitment that’s involved.

What You Can Do About It

Luckily, it can be planned for. Just like any other financial objective, strategies can be put in place ahead of time to save for the upcoming costs and navigate the uncertainty as easily as possible. 

The first thing you need to decide is what having children looks like to you. Here are some questions you can ask yourself to get started:

  • How many would you like to have? 

  • How close together in age?

  • Would you like to go through the NHS or private? If the latter, budget £10,000 to £15,000 for the consultant fee, and the same again for the hospital costs

  • Will either parent take a break from work or reduce hours? What is the hourly rate of each parent’s income? To calculate this you can use the formula (Salary/52)/Hours Per Week = Hourly Rate

  • What sort of maternity and paternity leave is available from your employer?

  • Do you want full time or part-time childcare?

  • Do you plan to send your kids to private school?

  • Will either of your parents be prepared to help?

These are all lifestyle questions, but they are all questions that have financial consequences. For example, if you’re earning £100,000 p.a. and you want to stay at home one day a week instead of opting for childcare that day, that choice will cost around £7,800 a year.

If you live in the catchment area of a fantastic state primary school, that could save you £5,000 or more each year in private school fees. 

Once you have a clear picture in your mind about what having kids looks like for you, the costs of raising them will become clearer.

You can also use investments to help cover some of the costs if you plan far enough ahead. This is a smart way to manage things, as it allows you to plan in advance and spread the cost over multiple years. 

This helps out in a couple of ways. Firstly it avoids the risks of paying for the expenses out of current income. Before you have children, it’s hard to know exactly what your life will look like afterwards. You may have planned to return to work full time, but then decide only to go back part-time, for example.

Putting aside a pot of money in the years prior can create more flexibility around these choices.

This is particularly relevant for large costs like private school fees. One example strategy would be to invest annually into a tax free ISA, which could grow over time and give you future access (without penalty) when the school fees are due. 

Starting early can make a massive difference to the total cost. In the UK, the average private secondary school fees are around £13,700 per year. Particularly if you have two or three children, this can add up to some serious money.

If, however, you began to invest money from when the child was born to fund this, you could get away with saving just under £4,500 each year. Not only does that place less pressure on cash flow in the peak years, by investing the funds it could mean over £20,000 of the fees are paid for via investment returns.

This same strategy can be used for all of the costs involved in raising children, from the car upgrades to the housing costs to the grocery bill. By planning ahead and spreading the costs, you can lower the total contribution required.

Your Homework

So yes, children are expensive, but it doesn’t have to be scary. By having a clear overview of what the financial impact is going to be, and putting in place a sensible long term strategy, you can make the whole process as stress free as possible.

As always, these costs need to be relevant to you and your situation. You can use the template below to start to gain an understanding of how a child will impact your own finances.

Financial projections can be a huge help with this type of planning, and we have a range of different tools available in our free app. If you want to discuss these types of planning questions, we’re always happy to book in a call.

Please note that this is not a financial advice and it does not take into account individual circumstances. Please also contact a professional advisor prior to any decision making.

The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is no guarantee of future performance.

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