Planning Family Finances for the Arrival of a Child

The addition of a new family member fills a home with happiness and joy, but it also requires time, dedication, and a significant amount of money. The arrival of a child turns the family's economy upside down, so it is advisable to analyze family finances in advance and plan for the future to avoid surprises or financial difficulties. In this article, we provide the most important keys to optimize resources and thus be able to enjoy the adventure without unexpected events.

Financial planning is a key factor at all times: the sooner you do it, the better.

Some families broadly agree on managing the family budget, without going into detail: we have a joint account where we contribute the same amount monthly, and we know what we should not spend or cut back on, but little else. This type of situation, quite common, is due to a lack of financial education.

The ideal is to avoid debt, already have a previous budget, and an emergency fund that simply needs to be adapted to the new situation. But if this is not the case, do it as soon as possible.

• Create a monthly budget with additional expenses to have something to guide you: you will know what you spend more than you should, what you can spend less on... and little by little you will adjust it to your reality. It is important that this budget be as realistic as possible so that it is useful. It is normal for there to be variations between the budget and actual expenses at the beginning, but over time, the variation will be less, and before you know it, you will be an expert in family finances.

A study by the OCU reveals that the average annual expense during the first year of a child's life is €7,706, about €642 per month. Do you see how important the monthly budget is? Systematically saving during pregnancy greatly helps to cope with the expenses of the first year.

• Avoid debts: both individual and as a couple, debts should always be avoided. Ideally, with the arrival of the baby, the debt should be paid off, so it may be a good option to refinance it or review the payment plan to have more flexibility.
• Adjust the emergency fund or create an additional one: an emergency fund is a sum of money saved to be able to face expenses over a period of time (usually from 6 months to a year or two). It is also a cushion to face any unforeseen expenses not included in the budget, and if it is not necessary to use it, you can allocate it to their education later, for example. You can also take out insurance to be covered for any problems, but keep in mind that it is an additional expense.

At this point, the perfect situation would be that once pregnancy arrives, there are no debts and the emergency fund is ready. Reality can be quite different, but at least we know what we "should" achieve as a base to make the journey easier.

• Tax benefits, aids, and benefits: dedicate time to thoroughly analyze any type of aid at the local, regional, or national level. You will be surprised by the variety of options, and you will surely find one that suits you.
• Plan purchases in advance:
  • Save money by buying on sales and clearances.
  • Buy sensibly, make sure it is really necessary: many first-time parents buy a lot of things they later do not use. Do not obsess over having everything the best, seek advice from experienced parents, as they will know what is necessary and what is useless.
  • Look for bargains in second-hand stores or platforms. Babies are babies for a short time, and certain things like a crib, a changing table, or a stroller, will likely be in perfect condition once the baby grows up.
  • Remember that it's not just the baby that needs purchases: the mother's clothing, for example, also needs to be renewed. There are many details that if not planned would be unexpected.
• Education: a child's education is probably the biggest expense. Therefore, we must plan it even before their arrival, at least in broad strokes. The most important issues to review are:
  • Public, private, or subsidized education? Many times we focus on university, but all expenses should be assessed from before nursery school. You may prefer different modalities depending on the educational stage.
  • Extracurricular activities: languages, support classes, trips abroad, school or home lunch...
  • University: it is complex to plan, as it is not a single decision by the parents. In addition, even within public universities, expenses vary greatly depending on the autonomous community, the degree... Also, whether your children live at home while studying or have to temporarily move out, with their consequent expenses, greatly influences the expense.

Great! Now that we have a clearer idea of the economic cost of a child and have a budget, "only" the money needs to be obtained.

Where do I start? Which option fits me?

When deciding what and how to do to achieve the budget goal, it is best to consult with an expert. If you do not have financial knowledge, you should contact a financial advisor to advise you on what financial product(s) suits you. For this, you will study the budget with its temporary objectives and the level of risk willing to be assumed.

If you are looking for a minimum level of risk, the ideal would be a savings account. The downside: it is currently difficult to find one that earns interest, so the money would lose value over time due to inflation.

If you do not want this to happen, and you also want to make your savings grow exponentially through compound interest, you would have to invest. Investing does not mean trading on the stock market or taking on great risks, it does not have to be complicated. Let yourself be advised by your financial advisor and forget about headaches: they will choose the ideal financial product for your situation and make the necessary adjustments in the portfolio to achieve your goals.

By planning in advance, we have the advantage that time is on our side, so the sooner we start, the greater the gains thanks to the effect of compound interest. How? We explain it to you in this article of Compound interest.

To visualize it better, you can use the investment simulator. Compound interest is already taken into account, that is, it is assumed that the generated interests will be reinvested.

Invoice and promissory note financing with Inversa is also a good option for your children's financial plan. If you do not want to be frequently attentive, you can make automated periodic contributions from your bank and configure the auto-invest tool according to your profile and goals. Remember that you can withdraw the money whenever you want, as it is kept in a segregated account. When your child reaches legal age, they could have their own account to transfer their money to and assume its management.