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Childbirth and financial planning: two facts of life that have the potential to be so pain-inducing that most people choose to ignore the details until the last possible moment. While we can’t tell you how much to prepare for the physical arrival of a new family member, we do trade in wisdom regarding your bank account, and it just so happens that there are some specific things you’ll need to do to get the latter ready for the former. Here are five important money things you absolutely have to do (if at all possible) before (or just after) you have kid. You’re on your own with the delivery.
1. Start Saving
You may have the urge to deal with your excitement/joy/fear/anxiety [insert favourite emotion] by buying a bunch of new baby things. Resist that urge. Or at the very least hold off until you’ve opened either an Individual Savings Account ("ISA") or a Pension ("SIPP"). Because here’s the thing: saving becomes exponentially more important once you have kids. One reason is simple math. There are literally going to be more people to take care of, and these new people are going to be revenue negative for the foreseeable future. The second reason is that having children makes living pay cheque to pay cheque way more perilous and ill-advised. So unless you enjoy playing financial Tetris with your bank account every week, do future you a favour.
First thing to do is figure out which account is right for you. A Pension (whether it be a workplace pension or a personal one) is meant to help you save for retirement, so the government will give you tax relief on your contributions (meaning you will get a 20-45% top up depending on your annual income); but you may be taxed when you make withdrawals. ISAs work the other way - your contributions are after-tax, but you don't pay any taxes when you withdraw. There's a lot of fine print, so it's best to do your homework.
But keep this in mind: because you can take money out of your ISA whenever you want to, it’s a much better place to save for relatively short-term needs, like childcare. We’ll get to that soon while we have you in a saving state of mind …
2. Make a Will (Let’s Get the Sad Stuff Out of the Way)
The ironic part about bringing a life into the world is it suddenly means you have to think about your own exit from it. It’s not fun, it’s not sexy, and it can be a little scary, but having life insurance, and a will, is no longer just about you. It’s an act of thoughtfulness about your children.
A will, for the uninitiated, is a legal document that outlines your wishes in the event of your passing, and as a parent, it covers two key things: how your assets are distributed, and who will take care of your minor children. If you die without a will, you're what's legally referred to as "intestate," which means you don't decide what happens to your possessions and your offspring. So don't wait, call a lawyer, make an appointment, think about the hard stuff.
Or do it online. If, like the majority of people, you have a simple estate — property owned in one country, some assets, maybe a child or two — you can use an online legal will platform to create your own. Wills don’t require a lawyer; they just need to be drafted by you (sorry, you can't pass this on to your parents) and signed and witnessed correctly. Platforms like Farewill have simple tools designed by estate lawyers to help you. Bonus: it's faster and less expensive than visiting a lawyer, and you don't have to get out of your pyjamas.
Regardless of what you decide, it’s always best to do a little research. And if you think you have a complex estate, or want legal advice, an estate lawyer may be the way to go.
3. And Don’t Forget Life Insurance!
Once you have children — or anyone else who depends on you financially — life insurance is very good idea. Especially if you have mortgages, loans, and other things that those nice people are going to be liable for paying if they want to keep living the way they’ve been living.
There are lots of types of life insurance. But for most people, the best option is something called term life insurance. That type of policy means you pay a premium every year for a certain number of years, typically 10, 20, or 30 years. It’s the same amount every year, determined when you get the policy. If you die during that period of time, the insurer pays a predetermined amount of money to the beneficiary (i.e., the person you told them to pay when you got the policy). If you don’t die, which is also nice, the insurance company keeps the money and you never see it again. It’s as simple as that.
You’ll also want to figure out how big a policy to get. A good rule of thumb is that your policy should provide between five and ten years of your income in the event of a piano falling on you. But it may be a good idea to get a policy worth more than that — consider all the expenses your family will have to cover, like mortgage payments and university tuition, and see how close you can come to that.
4. Open a JISA and Collect Free Money to Put Towards Your Child’s Future
While it is true that your hard earned money will start to disappear in new and unusual ways with the arrival of your baby, there are ways in which your bundle of joy can actually bring in some cash. (No, we’re not talking about a career in infant modelling.) A Junior Individual Savings Account ("JISA") is a saving and investment account designed to help parents save for their child's future.
There are two types of JISAs: cash accounts, and stocks-and-shares accounts. The cash JISAs work a little like savings accounts. And the better ones can offer as much as a 3% annual interest rate. That’s a lot better than just about any regular ISA or savings account.
But even a 3% annual return may not be enough to put you on the fast track to debt-free education. Why? First of all there's inflation — right now the inflation rate is about 2%, which could cancel out most of the gains you’d make in your cash JISA. With a stocks and shares JISA, the money is invested in the stock market. The earlier you get started, the more time you have for your children's savings to grow (and hopefully see healthy returns). Also, money can't be withdrawn until the child is 18. This removes the temptation to dip into the account before the money has had time to mature or make decisions based on emotions - like pulling money out when the market hits a rough patch.
5. Apply for Child and Family Benefits
In the UK there are two Child Benefit rates for eligible families to help with the cost of raising children under the age of 16 - and there is no limit to the number of children you apply for. You’ll receive £20.70 for your eldest child, or if you only have one child, and an additional £13.70 per child every week. As with most things in life there are requirements to be eligible, so make sure to check out the the fine print.
6. Make a Plan for Childcare. Now. Really.
One of the most critical financial decisions you must make after you have a child is: will both parents go back to work, and if so, who’s going to watch the kid during normal business hours? While you may enjoy watching your child’s every waking (and possibly non-waking) moment, it’s highly unlikely you’ll be able to find someone who enjoys it enough to do it for free. Not only is childcare not cheap, it can be hard to come by. Start researching options well in advance of your work return date, and make a budget for it so the expense doesn’t cripple you. Knowing how much childcare you’ll need, and when, and what it’ll cost, can be affected by parental leave. Which brings us to our next point.
7. Make a Plan for Parental Leave
First, take a moment to celebrate that you live in UK. Seriously, sing a few verses of God Save The Queen and be grateful you don’t live in a country where family leave is meagre and often unpaid. Depending on how long you’ve had your job, new moms can take 26 weeks of leave (and up to 26 with extended leave). And law stipulates that you can’t lose your job because you had a kid or went on leave.
But figuring out how to navigate the financial and governmental and employer related rules of leave can be complicated business. Just knowing what the government does and doesn't provide can sometimes feel like it requires a masters degree in public health. For instance, there are two kinds of leave – maternity and parental. Maternity leave is only for mothers; parental leave is for either parent. The government stipulates that employers allow 39 weeks of paid maternity leave. Parental leave is shorter — 18 weeks for standard parental leave annually - but it is not paid and can be split between parents. For joint parental leave, the government will offer you Statutory Shared Parental Pay (“ShPP”) which comes out to £148.68 per week or 90% of what you make per week - depending on which is lower. Have questions! Of course you do. It's smart to educate yourself, so start by reading this.
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