Whenever someone asks me how much they need to save for a family, a young client of mine, Felix, always springs to mind.
In his mid 20s, Felix and his partner had been together for 3 years. Having recently married they wanted to put plans in place to be able to afford a family in a few years time. Felix felt very lucky to have had a comfortable and loving upbringing, and was passionate about providing the same for his own children.
After delving deeper into the details of their future plan I learned they were planning to share parental leave when they start a family. This meant they would need a pot of money to help supplement their incomes for the first few months, and after that to help with childcare costs.
They were also certain that they wanted to send their children to private school from the age of 8, so they’d be paying hefty annual fees for at least 10 years for any children they have.
Once we built these early and later stage family costs into their financial plan the results were eye opening!
On their current salaries they were not going to be able to cope, so putting a robust savings plan in place early was crucial. After estimating the potential costs of having 2 kids, we put some targets in place and finalised a savings plan for Felix and his partner.
Given the time frames they were working to, the plan included a mixture of short term liquid cash savings for costs leading up to, and immediately after birth, as well as a longer term investment plan for the kids future private education. We decided to make use of efficient savings vehicles such a regular saver in the short term and Stocks and Shares ISAs in the long term.
Through working with Felix and other clients planning to start a family (or expecting an arrival) I repeat the same things time and time again.
1. Establish what you’re saving for (e.g; private school, university fees, future house deposit etc…)
How much you need to save will vary greatly depending on how you plan to raise your children.
Will you both work? Will you send your kids to state or private school? Do you plan to help with their university fees or a future house deposit?
Answering these questions early will help put the right plan in place for you and your family.
2. Start saving as early as possible
It might sound cliche, but the earlier you start saving the easier everything becomes.
If you know you’ll need cash in the short term to cover costs before and after birth, then you’ll need to save a significant amount now.
If you’re covered in the short term but plan to help with university fees or a house deposit, you’ll have more time to save.
In either case it’s important to start now.
The later you start, the more you’ll have to save each month in future, and compounding interest can be very powerful when saving in the long term.
3. Make the most of the savings options available to you
There are great savings vehicles that you can take advantage of for children that should give better returns than your typical savings account.
If you’re planning to start a family right now you might be restricted to saving in cash, but if you’ve got a couple of years, make the most of your ISA allowances (and that includes Junior ISAs if you already have children).
You’ll often be able to get a better interest rate on cash savings if you set them up in your children’s names.
4. Be realistic about what you can and can’t help with
Make sure you understand how any goals you have for your children will impact on your own financial goals (e.g; securing early retirement, upgrading the house etc…)
If there are higher priority goals then make sure you don’t find yourself hamstrung by being over ambitious about how much you can save for your kids.
5. Don’t forget expenses (moving house, bigger car etc…)
A lot of the time childcare costs, education, helping with house deposits, first cars etc… dominate plans, but things like moving house and getting a bigger car are often forgotten about.
It’s very common these days for people to move to get closer to their school of choice, and the costs associated with decisions like this shouldn’t be underestimated.
Be prepared for as many aspects of family life as possible to reduce the risk of nasty surprises.
Your future (less stressed) self will thank you!