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Of all the things that cross your mind in the run up to having children, finances will not be the one you’ll want to dwell on. But how you plan to manage your money both before and after the patter of tiny feet is important.
Children are amazing – but expensive! And the hardest thing is bearing the extra costs with – often – a decline in household income. So, what do you need to think about?
The cost of raising a child
The ‘basic’ cost to a couple of raising one child to the age of 18, excluding the cost of childcare, is estimated to be £165,872, or just over £9,215 a year, according to the Child Poverty Action Group. With childcare costs and additional housing costs included the ‘cost of a child’ more than doubles to £259,028 or over £14,390 a year. When childcare costs are considered, young families are one of the groups most at risk of living in poverty.
The early years of your child’s life could be the most expensive, particularly if you have childcare costs to pay. But it might still be expensive later depending on whether you plan to choose private schools, help with university education or house purchase. Planning before you start a family could go a long way towards preventing you from struggling financially once you become a parent.
Maternity, paternity, adoption, and parental leave
The extent of the financial pain you feel during the first year of your child’s life depends on whether you are employed, self-employed or unemployed.
If you’re employed, a key factor is the generosity (or otherwise) of the parental leave package from your employer (and your partner’s employer if applicable.) The first step is to check the parental leave policy in your contract – and your partner’s contract. If you’re thinking about changing jobs before you start a family, it’s worth bearing in mind that large employers tend to be the most generous when it comes to paying enhanced maternity pay. You usually have to have been employed for a minimum of six months before you become eligible for maternity or paternity leave pay.
What are you entitled to?
It’s important to find out what you leave you are entitled to when your baby is born. There is a calculator which helps you work out if you would be entitled to maternity pay, maternity allowance or paternity pay Check if you can get Maternity or Paternity Leave or Pay, or Maternity Allowance - GOV.UK (www.gov.uk)
You might benefit from a great maternity package from your employer. However, if you are only entitled to Statutory Maternity Pay (SMP) for 2025/26 this amounts to £187.18 or 90% of your average weekly earnings (whichever is lower) after about six weeks.
For parents who are in work but don’t benefit from any additional employer parental leave there is a statutory entitlement to ‘shared parental leave’. More information can be found at Shared Parental Leave and Pay: How it works - GOV.UK (www.gov.uk)
The financial benefit of shared parental leave is that a higher earning mother can return to work sooner and the couple still benefits from some sort of statutory pay for the stay-at-home parent. It’s important to take into account your partner’s earnings and benefits, including pension, as well as your own, when deciding what is best.
Even with the most generous employer, parental leave is unlikely to offer you full pay for the whole of the first year. For much of that period you could find yourself on a reduced income or even with no income at all, so it pays to have a financial buffer in place. Hopefully, you’ll have spare cash set aside in easy access savings accounts for use in an emergency. But if you don’t then it’s important to work out what your reduced budget will be and the affect it will have on daily life.
Reduced working hours
It’s not just the cost of feeding and clothing your child(ren) that has an effect on finances. It’s also the likely drop in household disposable income as well. It may be difficult, if not impossible, to work in the same way as you did before your baby was born. Although since 2020 the most common working pattern for heterosexual couples is for both to work full time, the second most common working pattern is for a father to work full time and the mother to work part time.
The significant rise in costs, together with a drop in income, gives rise to something we have called “the concertina effect” – a double hit on parental living standards as costs go up and income goes down. This squeezes the disposable income of parents significantly compared to the amount of spare cash they had before children.
Childcare
Your child may qualify for free childcare or you may get financial help towards the costs. But even so, childcare can be very expensive and you might need to book a place before the baby is born. Find information on the costs of childcare in our guide.
Pension and savings
If you are entitled to maternity leave, for most of the time your employer’s pension contributions will stay at the same level as they were before. But your contributions to the pension will come down according to what you’re being paid. However, if you take 40 weeks or more then it depends on what your contract says. Your HR department will explain what you are entitled to.
If you are in salary exchange scheme (which means that your pension contributions are taken from your salary before tax is paid) then your employer will continue to make all of the employer contributions as before. But your employer might have to stop you being in the salary exchange if your earnings are below the national minimum wage.
If one person works part-time, then this will have an effect on their future pension as well as potentially on promotion prospects. More information can be in this article about the gender wealth and pensions gap. The amount that you and your employer pay into your pension is based on a percentage of your salary. Before you make the decision about who is going to work part time, it’s worth looking at pay and benefits and perhaps even considering if you and your partner could both reduce your hours slightly. For example, a couple who each earn around £35,000 could decide that one of them will work 3 days instead of 5 days. But the person who works 3 days is a nurse in the public sector. This comes with very valuable pension benefits. So, it might make sense for each person to reduce their working week by one day. Not only does this mean that they both have time with children, but it also means less of a reduction in future income.
If you have less money left over once you’ve paid your bills, you will find it harder to save, but it’s important to try and have an emergency fund. More information on emergency funds is in this article.
Mortgages
Often people want to move to a bigger house as their family expands but mortgages are based on salary and if you’ve reduced your salary then that will have an effect on the amount of money you can borrow. Lenders will also take childcare costs into account. This can mean that the amount you can borrow is significantly less than it was before.
