When starting a family future parents make plans for the nursery, get expert medical advice, buy the required baby paraphernalia and sort out their leave entitlements. However, what many fail to do is also plan for and organise their finances ready for the next twenty-something years of child rearing. With one partner out of the workforce for an extended period, increased expenditures and less spare time parents are usually hit by the enormity of the expenses parenthood brings.
A NATSEM (University of Canberra) Income and Wealth Report from 2012 found that child rearing costs are rising. The study showed that for your average middle-class Australian family, the cost of raising two children from birth to twenty-four (end of higher education age) has risen over the last decade from $448,000 in 2002 to $812,000 in 2012. It also found that the costs associated with raising two children had increased 50% from when the same research was conducted in 2007, whilst household income had only increased by 25%. This indicates that the costs associated with child rearing are growing at twice the rate of average incomes putting significant financial pressure on families.
The NATSEM study took into consideration the total costs of raising children including transport, food, recreation, housing, child care, clothing, furnishing and equipment, education, health and fuel and power; and found that children cost more the older they get. Overall the total costs of raising children is affected by household income and location. Households with low, medium and high income make different decisions about education, child care and extra-circular activities. These decisions craft a cost divide of $474,280 for low income to $1,097,278 for high income. Likewise, location affects costs. Those living in Sydney or Melbourne were found to have higher child raising costs, driven up by the cost of education in these areas. Overwhelmingly however, the biggest costs of child raising are transport, food, recreation and depending on income level, education (see below table).
The lifetime shopping bill for two children, from birth until they finish their education in 2011-12 dollars
|Expenditure Item||Low Income||Medium Income||High Income|
|Furnishing & Equipment||29,812||50,425||37,922|
|Services & Operations||15,092||18,960||14,377|
|Fuel and Power||13,813||17,413||19,280|
Source: NATSEM calculation from 2009-10 Survey of Income and Housing Basic Confidentialised Unit Record File.
Things to consider before having children:
Raising children for many parents will be one of the largest financial investments they will make in their life time. It is therefore important that the financial side of child raising is considered and planned for before parenthood (if possible). Retirement, investment and basic living expenses also need to be considered for the future financial security of the parents once the children have left home.
- Pre Baby Planning/Planning Ahead
Start saving now. Put money aside for baby nursery and the loss of income if one parent needs to take time off work. Consider what your childcare requirements will be and how long you can sustain you mortgage on one income when estimating how much money you should save in advance.
Before you have children is one of the best times in your life to invest in yourself. Educating yourself earlier will help create better employment opportunities in the future which can have a positive impact on future earning potential.
- Family Size
It is lovely to think that you want a large family, but will you be able to financially provide the best opportunities for your family the bigger it gets? More children equals more responsibility and higher costs from sport, schooling and health care. The costs of larger families quickly add up.
- Think Strategically About Your Future Home
Transport costs was listed as one of the highest child raising expenditures. Strategically considering where your family home is located and its proximity to schools, family and extra circular activities could have a major impact on the family budget. Also, if you buy a house that is appropriate for the size of your family, without the need to upgrade, that will minimize property translation costs like stamp duty etc.
Things to consider after having children:
- Cash Flow and Budgeting
Pay close attention to where your money goes. Set budgets and stick to them for food and recreation expenditure. Being smart at the supermarket can save you thousands over the lifetime of your children.
- Pre-Retirement Planning
Many couples can get caught up in the day-to-day of child raising, but it is still important that money is put aside for the long term. Planning for retirement is still an important aspect of the family budget during the child rearing years.
- Family Protection (Insurance)
Have you considered what would happen to your family if something happened to you? With dependents it is important that you are appropriately insured to ensure that your family can still pay the mortgage and put food on the table in the event of injury, illness or death.
- Estate Planning
Having a will is an important step in your estate planning – however once you have children it becomes even more important as it can detail your express wishes for the care of your children after your death. It can detail provisions made for their care and how it is to be funded.
- Future Fund
If you plan to send your kids to private school for high school, dream they will attend university or want to buy them a car for their 21st a future fund is a great idea. Even small amounts of money, invested over the course of your child’s life with compound interest, can build up to a substantial amount of money. This strategy can help you to afford the bigger expenses when the time comes.
Cost Saving Tips
Raising children takes a long time and a lot of resources. Small day-to-day changes can add up to big savings over the course of the child’s ‘dependent’ life. Below are some additional tips for saving money.
- Try to lessen transport costs by living, schooling and working in close proximity. Consider if it is cheaper to drive your kids to school or for them to take public transport or ride their bike.
- Utilize grandparents for childcare where possible.
- Buy in bulk to save money and take advantage of sales and coupons where possible.
- Budget for variable expenses like food and recreation and stick to it.
- Get your children to make choices about sports i.e. pick one only instead of three or four and take responsibility for their choices.
- Take advantage of fun, free recreational activities like going to the beach, kicking a ball, throwing a Frisbee, bushwalking or flying a kite.
- Limit portion sizes – don’t over feed your children.
- Buy gender neutral clothing so they can be reused for second child. Buy second hand clothing or if possible use hand me downs.
- Seek advice of a financial planner about managing your affairs.
Every parent wants what is best for their child however, with the high costs associated with raising children it is not always easy. Having a sound financial plan can help maximise what parents can provide for their children, which is why it is wise to seek advice from a financial adviser. In consultation with a financial planner parents can make informed decisions about investment options, term deposits, mortgage structures and how to maximise their superannuation.
If you would like to further discuss how you can plan ahead before starting a family or get support about looking after your family by utilising a number of financial planning strategies, please contact Certified Financial Planner Elliot Watson on 0409 931 984 and start the conversation.
Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 AFSL 238429. The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances.