A guide to baby finances
The financial aspects of starting a family
Having a child is a financial double-whammy. Not only do children cost a lot, but you also have decreased earning power while one person takes time off work following the birth.
Can you prepare for these changed circumstances?
NZ offers good paid parental leave, but what happens when that finishes? Do you drop to one income? Or do both parents work while the child is at daycare? There are various tax benefits and allowances that new parents and families can receive. What are you eligible for?
An average family will spend $12,000 a year on each child, and $15,000 in their first year.
Can you afford to have a child?
How to plan financially for a child
Follow these six steps to prepare for your child’s arrival. This guide will help you to answer these questions and plan for the future.
1. Take a financial inventory
Take a look at your financial situation. How much are you spending or saving? How much income do you have? How much debt do you have? It might be time to consider a loan to consolidate your debts, or clear your credit card debt.
2. Plan for parental leave
How much time can you afford to take off? Weigh up if placing your child in childcare is financially worth it. Can you get extra subsidies from the Government?
3. Sort out a baby budget
Below is a list of standard baby apparel requirements. Many of these, such as cots, change tables, and strollers, can be purchased cheaply second-hand or often are given away for free from friends or family. What can you afford to spend on? What can you save on? What do you need to buy before the baby comes? Are you considering car finance for buying a family car? A new house? Do you have to move?
4. Complete a household budget
Complete a budget for your future income as below. Take stock of all your debts, income, and expenses and see how you can make it work for you.
5. Check your savings/emergency fund
Contribute more to your savings account. If you don’t have one, start saving today. The advice is that three to six months of living expenses is a good amount to have stashed away.
6. Health/life insurance for yourself and your baby
Do you have insurance? Do you need it?
7. Live like you have a child already
Look at this budget you’ve created. Follow it for a month. Is it doable? Can you sustain this?
Parental leave in New Zealand
Paid parental leave (PPL) is an entitlement that is paid by the NZ Government. It’s designed so that the primary carer, whether mother, father, adoptive parent or grandparent, can stay home for a period of time based on how long you have been in employment, to raise the child. It covers loss of income in order to care for a new born baby or a child under 6 who is now in their care.
The PPL can be transferred to a spouse or partner. If they qualify for PPL, you can transfer some or all of a PPL entitlement.
To qualify, you have to have permanent primary responsibility for a child under the age of six. You must have worked for at least ten hours per week for at least 26 weeks of the last year up to your due date. This means that if you’ve had multiple employers or a break-in employment, you are still able to receive PPL.
How is the PPL amount calculated?
PPL payments equal your current pay, up to a maximum of $538.55 gross a week. The IRD pays your PPL into your bank account every fortnight. These payments are treated the same as income, so will have tax, KiwiSaver and student loan deductions removed. If you’re receiving another source of income, either that or your PPL will need to be processed as secondary tax.
If the baby arrives before 1 July 2020, you get up to 22 weeks of paid leave. From 1 July 2020, the new mother will receive up to 26 weeks of leave.
What if you’re not eligible for PPL?
Parental tax credits are available for parents who are not eligible for PPL. It’s lower than parental leave but still a positive addition to the family finances.
KIT (keeping in touch)
KIT is a limited number of hours you can work while on PPL that doesn’t affect your entitlement. You can work up to 52 hours over 22 weeks (or, after 1 July 2020 you can work 64 hours over 26 weeks). However, you can’t work any of those hours in the first four weeks following birth.
How can you manage your finances with a new baby?
Many households will drop to one income following the birth of a child. Once the paid parental leave finishes, how will you manage your finances?
Best Start tax credit
If your child is born after 1 July 2018, you are eligible for Best Start. This is a $60 a week payment that you receive until the child turns one. If your household income is less than $79,000, you are eligible for this payment until the child turns three years old.
Working for Families
The Government also offers assistance in the form of Working for Families tax credits. This complex system is designed to support households through child-raising by providing tax credits. This is dependent on your income but is available to all New Zealanders and permanent residents with dependent children.
There are grants and subsidies available for home help after twins and triplets if you have other children under five years old.
Childcare options returning to work
The question on every new mum’s lips – is it worth going back to work? Quite aside from the sanity that work provides, the much needed income may be worth it if it covers the cost of childcare.
Childcare subsidy for limited income families
If you are not lucky enough to have friends or family available to provide free childcare, you may be eligible for a childcare subsidy. This subsidy is for income-limited families. It allows for children under 5 to attend an approved ECE (Early Childhood Education and care service) such as kindergarten, preschool, Kohanga Reo, or approved home-based care for up to 50 hours a week providing you meet WINZ’s criteria.
ECE 20 hour subsidy
There is also the 20 hours of subsidised ECE care a week. This is to be used for a maximum of six hours a day, for children aged three to five years. These 20 hours are paid directly to the provider. Depending on the centre, you may be required to top up the hourly amount and the centre may also insist that the child attend for the full eight hours a day. So you could pay an extra $1 or $2 an hour, plus the extra two hours at full price.
The average hourly charge for daycare ranges from $6 – $10 an hour. Therefore, for a full working week, you may have to pay a top-up for the subsidy, 20 hours at the full rate and some centres also charge extra for meals. Realistically, you could be paying $150 -$200 a week for your childcare. While this might be worth it for one child, two children may be less affordable.
Alternately, some centres – often rural ones – offer 30 free hours of childcare a week if you guarantee your child will attend there until school age
Primary and secondary education
The next step for your children is school. While public schools in NZ are excellent and purported to be free, they are not. Every year, there is a ‘required donation’ for each child, which helps to fund the school. This ranges from $100 – $200 a year. There are also after school activities such as swimming lessons, music lessons, dance/tumble/ gymnastics and sport. These do not come cheap, costing between $100 to $300 per term.
There are OSCAR subsidies for before and after-school care, which you may require if you work longer hours than the school day.
Once your child reaches secondary school, costs increase. School uniforms, class trips, and stationery all add to the expense. This of course doesn’t include food for the insatiable appetite that teenage boys have!
How can you plan for all these expenses? Do you intend to help your child pay for University or Polytechnic education?
Is KiwiSaver worth it for children?
The very best advantage you can give your child is a savings account. This can be a head start for their retirement savings, house deposit, or university fees. Whatever it is, you can start a KiwiSaver account, or a traditional savings account.
A KiwiSaver account attracts fees each year that will likely leave you with less than you started unless you can save a lot of money. Until your savings have reached a reasonable amount, it would probably be wiser to open a bank account in their name. Not only does this mean you won’t attract account management fees, but it also means your child can use these funds for something other than their first home or retirement.
Compound interest means that long term savings are a wise idea. If you invest $100 and then save $2 a week at an interest rate of 4%, in the first ten years you’ll save $1060 but make $267 in interest. If you invest $100 to start and save $2 a day, you’ll save $7,400 and make $1584 in interest. If you do this until they are 18, it will be $20,000 towards a house deposit!
Next steps in life
Life continues once you’ve had a child. Are you considering buying a house or starting wedding planning? What are your goals and dreams? Follow these five steps for a basic wedding plan.
Planning your wedding
There is a huge amount of time, energy, and money that goes into planning a wedding. Are you a splurge-because-it’s-a-once-ina-lifetime type of person? Or, are you slightly more constrained by budget or attitude, and wanting to have a great day without spending everything? Follow the steps listed to plan an amazing day… without ruining your finances.
1. Establish who will pay
Who will pay for your big day? While traditionally the parents have paid, increasingly the bride and groom pick up the entire bill. If you are unsure, ask if the parents are willing to contribute, and how much. If you have a bridal party, do you expect the parents to pay for everything themselves, or will you be footing their expenses? Do you have money in savings to pay for the wedding or will you require a wedding loan?
2. Set a budget
Set down how much you are willing to pay for your wedding, and allocate it to the various expense areas. Discuss with your partner what is important to you and make decisions together about where most of your funds will be spent.
3. Decide where to cut costs
There are many extras where you can save a few dollars, it just depends what is important to you. There are a few simple measures you can take like skipping the favours and using in-season flowers that you can do and no-one will notice! Using a sheet cake to serve to guests but only a small decorated cake for ceremonial purposes is another sneaky way to save money.
Think about the difference in prices between an all-inclusive venue vs a marquee in a nice garden. While it might appear that you’re saving money by not paying a hire fee for the garden option, the costs for self-catering soon add up. A marquee wedding will require table and chair hire, tablecloths, staff hire, plates and cutlery, a DJ…. The list goes on. If you aim to save money, an all-inclusive venue may appear to be more expensive but at the end of the day, finish up being cheaper.
4. Destination wedding
There are pros and cons for a destination wedding. While it’s a way to have an amazing time with those you love, some may not be able to afford to attend. And if you have your honeymoon straight afterwards, the entire family will be in attendance!
Where are you going for your honeymoon? A quick drive around the South Island, or something more elaborate? Are you planning that European jaunt you’ve wanted forever? The costs for the honeymoon will also need to be accounted for. You can set up a honeymoon fund with a travel agent and ask guests to donate in lieu of a gift (after all, there are only so many toasters and platters that you need).
Buying or renovating a home
Buying a home is the biggest financial commitment you’ll ever make. It is an investment in your future, and simultaneously a huge anchor on your finances. How you manage this can set you up for the rest of your life.
How much can you afford
How much you can afford to spend depends on how much of a deposit you have saved, and how much the bank decides you can realistically afford to pay back each month. If you are buying your first home, with some conditions you can use your KiwiSaver as a deposit. If you don’t have KiwiSaver or can’t use it, then you will have to have a 20% deposit saved.
Approach your lender with all your financial information and find out how much they will loan you. They will need to know your income, all debts, and they will run a credit check to find your credit score.
Approach more than one lender. You want to get the best possible deal and the lowest interest rate. Check their fees for setting up your loan, and also any penalties you may incur for paying off the loan earlier than planned.
Why have you purchased a home?
Do you intend to live there? Or are you wanting to renovate and then sell for profit? Remember the Brightline test. If you buy and sell your home within two years, (with the exception of the family home) you may be required to pay tax on the profit made.
If you do intend to make home improvements, then make decisions around what will increase value of the house the most. A coat of paint and tidying up the entrance of the home to increase street appeal are cheap and fast ways to increase value. For a bigger investment, doing up the bathroom and kitchen offers an attractive prospect for buyers that may not want to invest the time in updating a worn utility area.
If your home improvement plans need money, how will you pay for them? If you take out a personal loan, the cost of interest should be factored into the renovation expenses.
Do you DIY?
When contemplating home renovations, it can be tempting to DIY to save money. However, it’s not always as much of a money-saving tool as you might think. Using the professionals is vital if you need council sign-off or a code of compliance on any electrical work. Also, think about avoiding DIY when plumbing is involved. A tiny leak can be imperceptible but create huge damage over time.
Savings and setting financial goals
Having savings is so important. It’s a vital safety net in case your car breaks down, if your child gets sick, or for anything else that life throws at you.
Tie into that your short and long term goals. What do you want? Identify your goals. A European holiday? To build your own home? When do you want it? Generally, a short term goal is within the next five years, and a long term goal is anything beyond that.
Prioritise those goals. For instance, buying your own home is a wiser choice financially than an expensive cruise on the Mediterranean… even though it might not be as much fun.
For your short term goals, set time limits. Do you want to be in your own home in two years? Four? Ten?
Using the budget you’ve already completed, find out if your savings are on track to achieve these goals.
The most important long term goal is retirement.
Retirement and KiwiSaver for you
You don’t want to get to retirement and be caught short. Your children will have grown up and left home, and may not have the ability to look after you financially. Even with the expenses of welcoming your child into the world and seeing them through life, you need to keep saving for your retirement.
While you assess your finances for your impending arrival, it’s a good time to think about your contributions to KiwiSaver. Log in and see if your fund is performing well. Assess if you are still in the right fund group, or if you want to change to be high-or-low risk. High risk makes bigger gains… and the potential for big losses. Low risk is appropriate for people close to retirement, but the medium risk is a balanced fund that offers consistent small gains.
Is your provider charging fair fees? It is entirely reasonable that your provider makes money for looking after your funds and investing them on your behalf. However if the fees are a large proportion of your gains (or, are eating away at your savings), then it’s time to look for another provider.
Check your rate of contributions. Are you going to be able to sustain the rate of contributions? Or can you afford a little more? Are you getting your Government contributions each year? If you deposit $1042.86 into your KiwiSaver every year, the Government tops you up $521. This is an excellent incentive to maintain at least the minimum amount.
Are you on track to retire when you want to? Most providers have calculators that allow you to change your contributions and see the projected changes to the funds. See what a difference 1% more makes over a ten year period.
Need a Personal Loan or a Debt Consolidation Loan?
There are many reasons you may need a loan. Planning an overseas holiday once baby is born? Or maybe you want to consolidate your debt to streamline your finances. Perhaps you have an amazing business that needs cash flow, or you need to invest in a sensible, reliable car. Maybe you want to take a step to further your education, making your future brighter and more secure. Whatever it is, there are many things to consider when getting a loan.
Quick guide to Debt Consolidation loans
If you have a range of debts or a considerable sum of credit card debt that you are struggling to pay off, you may want to consider a debt consolidation loan. This puts all your debts together in one easy-to-manage loan, often at a much lower rate than a credit card or car loan. If you do need a debt consolidation loan, figure out how much you require. Sit down with all your bank statements, debt and credit card documents, and payslips. Find out how much debt you actually have.
Set a budget and figure out how much you need, and how much you can afford to pay back. A personal loan calculator or debt consolidation loan calculator will help you understand the implications of loan period and interest rates.
Approach your lender with everything they require; proof of ID, address, three months of bank statements or online banking login, income proof, current debt statement, and current assets/expenses. This is an exhaustive list and it shows your lender you are organised, and serious about managing your finances. Remember, a loan provider wants to loan you money but you must prove to them that you are capable of repaying that debt.
Now, find a lender. Check out how reputable they are and the interest rates they are intending to charge.
Credit Card, or Personal Loan?
The only time you should consider using a credit card for any type of debt is if you can pay it off in a very short timeframe, preferably within a month so it doesn’t attract interest. The interest rate for credit cards is typically around 20% or higher, and this adds quickly to a level that can become unsustainable and difficult to pay back.
If you do need a personal loan, remember to shop around. There are a variety of different options and rates available. If you have a mortgage, you may be able to top up your mortgage which will be at a lower interest rate than a personal loan.
If you are applying for any type of credit in NZ, the lender will check your credit score. This is a number between 0 and 1000 that tells the lender how risky you are to lend to. Your credit score can affect the outcome of your loan application substantially. In NZ, there are three providers of credit reports:
Contact them all and request a copy of your credit report. They require proof of ID and address. If there are errors, contact the provider and get these resolved. Any missed bill payments, loan defaults, bankruptcy and court judgements can reduce the likelihood of getting your loan approved.
You can work on improving your credit score. Pay your utility bills and credit cards on time every month. Positive information is also recorded and will help to improve your credit score. While you work on improving your credit score, save money too – it’s great to be able to show lenders that you are capable of paying off debt AND saving. Download our eBook ‘10 Ways to a Better Credit Rate’ to find out more about improving your credit score.
Key points to keep your finances stable for you and your family
Throughout your life, there are a few sensible things to do consistently to create stable healthy finances.
Regularly look through your finances
Create budgets in order to understand where your money is going. Budgets are not a punishment! They allow you to plan and make allowances for meals out and other fun events.
Have two savings accounts
A rainy-day savings account, which should have enough funds in it to cover two to six months of expenses. Your KiwiSaver and/or retirement funds need to be locked away and not touched. Small regular amounts over long terms add up.
Don’t get into debt if you can avoid it
If you do find yourself owing money, pay it back as fast as you can. Debt affects your credit rating which may have a significant impact on your long term goals and future borrowing needs.
All debt is not equal
High-interest rates on credit cards can make them a finance killer. If you find yourself in credit card dent, see if you can transfer the debt elsewhere for a lower interest rate.