How to Financially Prepare for Your Child's Future

There’s no two ways about it: from nappies to tertiary education, children are expensive. Knowing that you’ve covered your bases when it comes to the cost of having your baby, covering your maternity leave costs, raising your child, and ensuring they get a headstart in their future is a key part of family planning. It’s also a huge factor in your mental wellbeing as a new or expecting parent.

We chatted to Laura du Preez, CFP and Editor at Smart About Money, and Ess Mukumbo, personal finance creator and financial columnist, to ask them for practical advice for parents when budgeting for their children and investing in their future. Here’s a summary for you – whether you’re a new or expecting parent, or planning your family – to absorb, share, and enrich your understanding as you embark on the adventure of parenthood.

📌 What to Prepare Before Pregnancy

1. Prepare Yourself Financially For A Baby

In our report, we were delighted to find out that 65% of the moms that responded to our survey felt confident they would be able to manage any financial crisis that might arise during motherhood. If you’re not already in the confidence camp, there are ways to prepare and things to put in place to boost it, and to make sure you can weather any financial challenge that might come your way.

According to Laura, this is what you should do before starting or planning a family to increase financial readiness and boost financial confidence:

• Get medical aid. If you plan on giving birth at a private hospital, make sure you’re on a medical scheme before you fall pregnant. “If private healthcare is what you want, it’s very important that you join a medical scheme before you get pregnant. Once you're pregnant, you're going to get waiting periods and the scheme won't cover the birth,” says Laura.
• If you’re already on a medical scheme, get familiar with the benefits of your medical scheme. Make sure you know what number of scans and doctor’s visits are included in your plan, and if birthing costs are covered. You might need to upgrade your scheme. “There are costs that don't get covered by the scheme. So pay attention to the detail of those benefits that are offered for maternity,” advises Laura.
• Get gap cover. Consider taking out gap cover – an insurance policy that pays for the gaps in your medical scheme – as this becomes particularly necessary if you have complications in pregnancy or during birth.

2. Factor Maternity Leave into Your Budget

You want to spend every moment with your new baby stress-free, right? Unfortunately, for many women that isn’t the reality. Something that really stuck out in the results of the survey – frighteningly – was the fact that 3 in 4 women who responded (75%) would not or did not get paid maternity leave.

Maternity leave – whether paid or unpaid – will likely have the biggest impact on your budgeting – whether solo or as a couple – when you’re expecting a baby. “If there were two incomes in the household and suddenly there's only going to be one for four months, how are you going to bridge that gap? It’s very, very important to establish upfront exactly how that's going to impact on your finances,” says Laura.

Whilst employers are legally required to give expecting moms 4 months of leave with their job secured, they’re not legally obligated to pay them during that time. If you’re an expecting mom employed full-time, review your employment contract and make sure you know where you stand on the following:

• Will your employer pay you for your time on maternity leave? If so, what proportion?
• If your employer offers benefits like medical aid and retirement fund contributions, will they continue to pay these during your maternity leave?
• Is there a work-back clause you need to consider?

Ess learnt the work-back clause lesson the hard way: “In my particular instance, there was a work payback period. I took four months of maternity leave, had my baby and then came back to work for three months before getting a new job.

But according to my policy, for every month of maternity leave, I needed to work back three months. My three months of work was only equivalent to paying back one month. So I still owed them for the other two months and I didn’t negotiate.

I had to take out a loan to pay back my previous employer. That loan took me four years to pay back. To this day, I wish I had spoken up with my new employer to take over that maternity leave that I owed my previous employer.” The bottom line? Make sure you know your employment contract inside and out and where you stand.

What if your maternity leave is unpaid? If you’ve been contributing to the Unemployment Insurance Fund (UIF), you are entitled to claim back from them during your maternity leave. How much you will receive is based on your income and how long you’ve been contributing to UIF.

Keep in mind that UIF can take a long time to pay out your claim, so make sure you understand the claim process before you give birth and have a fall-back plan in case they don’t pay out during your maternity leave.

When you’re budgeting for your baby, make sure you’re clear on the income you will be receiving during this time and any additional costs (like paying for benefits your employer was contributing to) that might arise.

3. Create a Baby Budget

One of the first questions we asked the new and expecting moms in our survey was whether they had a budget in place to manage their household expenses with a child in the picture. We are happy to report that 61% – the majority – had set up a budget.  

Unsurprisingly, having a budget was positively aligned with feeling confident in dealing with any financial crisis that might arise.

Thato Schermer – who had just had her baby 3 months ago – put this well: “As a new mom, I was completely unprepared. So I started with just the basic day-to-day needs for my child. We created a small budget for pre-birth and post-birth. I spent a lot of time researching the best investments for a child, how best to prepare, and how much my baby was actually going to cost me.” If you don’t have a budget, you need to start one as soon as you can.

So what do you need to budget for when you’re expecting a new addition to your family? According to the panellists, there are:

• Costs that will go up (like your medical aid),
• New costs that you’ll incur (like setting up a nursery, nappies and baby food),
• Unexpected costs (like getting a bigger car or home with another room), and
• Costs that will come down (like entertaining and going out for dinner).

Here are some pointers from the panellists that will help you nail your baby budgeting:

• Review your baby budget often. Things change, and there might be unexpected costs and places where you save money. Create a household budget where you factor in baby costs, and then review it monthly and adjust as needed.
• Don’t believe everything advertising tells you. “As new parents, you're excited. I literally bought a nappy bin that I never used. Sales people see you all starry-eyed and they want to sell you everything under the sun. I fell for it because I wanted the best for my kids. When the child was born, I realised I didn't need some of the stuff I'd bought. I could have spent my money better.” says Ess.

🍼 What to Prepare After Baby is Born

1. Prepare Your Family For Any Eventuality

Our panellists couldn’t emphasise enough how important it was to make sure you’ve protected yourself and your family for any event that might come your way.

After you have your baby, there are certain things you can do to make sure you’re prepared for any eventuality:

• Make sure you have life and disability cover.
• Add your children as beneficiaries on your life insurance, pension fund or retirement annuity.
• Make sure you have a valid will where you’ve named a guardian for your child. On your will, indicate how you would like your money to be managed if your child is still a minor.

Ess emphasises: “Please don't forget to add your kids as beneficiaries on your pension fund or your retirement annuities once you have them. I know a lot of people that have kids and don't update their policies to include them as beneficiaries and believe you me, things get sticky when something happens to you and your children go to the provident fund or pension fund trustees wanting money and they see you don't have your kid as a beneficiary.”

2. Start Investing in Your Child’s Future

Parents who invest for their child early in their lives benefit from the magic of compound interest: the earlier you start investing, the more your money can grow and compound over time. Start saving as soon as you can after your child’s birth to give you a long time horizon to maximise your potential growth.

This was something Ess was particularly passionate about and has made a point of doing for her own children: “I believe in starting early and starting small – even if it's R100 a month. The earlier you can start, the more you allow compound interest to happen to your money. My child is 10 years old and I know by the time he's 18 he'll be ready to do his tertiary studies. So for me as a mom, that's very important to me to say, I might not have the full amount, but at least let me have something.”

Some Tips When Investing for Your Child

1. Passive unit trusts and index-tracking exchange traded funds (ETFs) – like the Satrix Top 40 equity fund Franc provides on the app – are low-cost, diversified investments to invest in for future education costs.
2. While tax-free savings accounts are great vehicles to invest in to avoid tax, be mindful of the R500,000 lifetime limit. These funds are best for very long-term savings (like retirement), and not ideal for education costs.
3. While education policies have the benefit of keeping you disciplined to a monthly contribution, they are contractual and require you to keep up regular payments, so make sure you’re able to stick to them. They can also have high fees.

Another reason to start investing early? According to Laura, who found this out the hard way, plans can change: “I factored in a three-year tertiary education, and my eldest is in her fourth year and applying for her fifth year, and she’s planning for a seven-year degree. So that was a very hard lesson to learn. When they're little, you have no idea what they're going to do and how long they're going to study for, or even if they're going to study. The more prepared you are, the more options you have when they do make that decision.”  

In summary, invest as early as you can for your child’s future and education. Find an investment strategy that matches your time horizon, and make a habit of putting even a little money away, regularly.

Make Sure You’re Financially Prepared

Becoming a mother is an amazing experience. Make sure you’re able to enjoy it completely by budgeting for the additional costs, getting all the relevant paperwork in place, and opening an investment account for your child’s future as early as possible