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26/10/2021

Making Cents: Family planning = financial planning

Making Cents: Family planning = financial planning

If your employer doesn’t pay maternity leave, then you’ve obviously got to be prepared for a big income drop

SOMEONE asked me recently, did I know what the cost of raising a newborn baby was in the first year.

I didn’t know the answer, but I promised I’d find out for them.

What I discovered could induce early labour because some sources were quoting €4,000, others €10,000 and one even suggested €15,000.

And of all the costs incurred by new parents, childcare was their biggest.

It’s quite a sum of money and very often when news that a baby is on the way, it’s a trigger for individuals and couples to reach out for financial advice, because they intuitively know the cost is likely to be large, and they want to plan for meeting it, and they also want to review how their monthly cash flow might be impacted as well.

Will a deficit exist, even if I’m on paid maternity leave? What if I receive nothing other than a maternity benefit from the state, what then? And what if I decide to take 16 weeks unpaid leave, how will that income gap be bridged? And when I return to work and childcare kicks in, what then?

Lots of questions to ponder, and lots of financial spinning plates that come with having a baby, which can make expectant parents feel a little bit overwhelmed.

So, let’s try break this down for them into manageable, bite size chunks.

First Year - Once Off Costs

The first number you’ve got to be mindful of are typically those once off expenses that you’re likely to incur, and they can be everything from maternity clothes, baby clothes, changing table, cot, pram, car seat, baby carrier, monitor, bouncers, sterilizer, formula, bottles, safety gate, toys, nursery furniture etc.

You need to put a number alongside each and what they are going to, individually and cumulatively cost.

And when it comes to planning for those future costs, time is your friend.

It makes small things grow big.

And look everyone will be different, but I’d plan for the worst and forget about hoping for the best.

A new baby might cost some people €15,000 in the first year and others €5,000. So, you need to crunch your numbers, and once you know what they are, you can be satisfied that what you’ve already set aside or what you’ve planned for will be fine.

For example, let’s say when combined they amount to €3,500, and you are seven months away from the baby arriving, well then, you’ll need to save €500 each month to reach that target.

And if you have existing savings in place already that cover the cost, I’d recommend you ring fence that amount and withdraw it from wherever it is and set up a dedicated account and call it baby expenses.

I like having dedicated accounts you assign funds to. I wouldn’t recommend mixing everything up into one account. Have a baby’s account where the cost of buying a car seat for example, is taken from that account. So, all things related to the baby and their costs is coming from it.

Have another account that is only going to be used when you go on unpaid leave. When you work out what that deficit is, the funds to bridge it are coming from this account.

Cashflow impact whilst on paid and or unpaid maternity leave

The next cost you need to be mindful of, is a possible monthly deficit that will exist when you go on maternity leave.

If your employer doesn’t pay maternity leave, then you’ve obviously got to be prepared for a big income drop, and you need to crunch the numbers to see exactly what you’ll be up against. This is where preparing a monthly budget will become so helpful to you.

Because when you do, you’ll be able to remove your current income, add in whatever state income you’ll be in receipt of, add in monthly baby costs etc. and you will then be able to see what deficit exists, if any. And knowing what that amount is in advance, will help with formulating a plan to cover the deficit.

Even if your employer pays maternity leave and awesome if they do by the way, you should still carry out this exercise because if you decided to take unpaid maternity leave for 4 months’ there might be a time when no income is paid.

A client of mine who’s pregnant was worried about her monthly cashflow, particularly whilst on unpaid maternity leave, so, I asked her to complete a monthly spending planner tool I sent her.

And she did, and when we re-connected, we ran several scenarios, the first being what income over outgoings or outgoings over income would exist on a reduced salary whilst she was on maternity leave?

We could plug in her reduced salary, remove the amount she was saving because that could wait for the months she was out of work, add in costs associated with the baby, and she was able to see that they were still going to be fine.

We ran many other scenarios and the output it delivered and the numbers for her were:

Outlay/Once off Costs - €5,900

Monthly Cash Flow (paid leave) - €320 (surplus)

Monthly Cash Flow (unpaid leave) - €759 (deficit)

Savings Required to bridge deficit (unpaid leave) until return to work - €3,036

Monthly Cash Flow (back to work, including childcare costs) – deficit €290

So, the total amount she needed for once off costs and to fund a monthly cash flow deficit until she returned to work was €8,936. And that was the target she needed to aim for.

They had existing savings of €5,500, that were separate to their emergency fund, which was great, so they’d only needed to top it up by €3,436 to hit their target, so €491 was their monthly savings number.

This preparation in advance and I’ll repeat knowing what their numbers were, took the pressure off, and they knew exactly what was likely to happen in terms of how much the once off baby costs will be, what savings are needed when she’s on unpaid maternity leave, and they even knew what the likely impact would be on their cash flow when she returned to work and childcare kicked in.

They could plan for this, months in advance and create a strategy of how they would deal with it successfully, because they know what adjustments will be required.

Summary

There’s no doubt that when you have a new child, life changes completely, and so do your finances.

You can either choose to ignore it and wing it and hope that your savings and support from family will be enough and they might be for once off costs, but it’s those ongoing monthly additional costs that didn’t exist pre-baby that you really need to be aware of and plan for.

You need to take the shock factor off the table, by doing your homework and by crunching the numbers and seeing where you’re going to land before and after you return to work. Trying to figure it out after the fact will just lead to increased stress levels and you want to try and avoid them.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or harmonics.ie

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