And Baby Makes Three

How do you prepare for a baby, financially?

Finding out that a baby is on the way is a delight for prospective parents. The littlest member of the family is sure to bring new parents much joy on arrival.

At some point, however, a newfound realisation that both partners' take-home pay needs to fund three sets in.

The actual cost of raising a child from birth to tertiary education can vary considerably, ranging from S$200,000 to S$700,000, according to a report last year.

Based on internal Standard Chartered Bank estimates, the average cost of raising a child to tertiary education would be about S$300,000, factoring in local tertiary education.

Preparing for a baby comes down to three Ps: Plan, prioritise and protect as early as possible.

PLAN
Proper cash flow planning means estimating expenses for everything from food and clothes to health and childcare costs. If a couple is having their first child, it is easy to underestimate, so buffering an additional 30 to 40 per cent for expenses would be appropriate.

After listing the costs, the couple should work out whether their salaries and savings are sufficient. If there is no shortfall, that is good news. If there is a gap, however, couples need to start making arrangements to cover it with the use of investment tools.

If mother or father plans to stop working after the baby is born, the months of pregnancy offer a time to test whether it is possible to live on a single salary.

Try putting one parent's salary into a savings account and live on the other. If it is a struggle, couples still have time to re-think their plans.

It may also help to buy things that the couple needs for the baby in advance. Even if they do receive gifts, parents still need to buy plenty on their own.

Buying these things before the baby arrives can help couples understand the costs better, and spaces out expenses so they do not all hit right after the baby is born.

PRIORITISE
To pay for everything from childcare to food and tuition, new parents may need to re-prioritise between actual needs and secondary lifestyle spending. While lifestyle expenses for dining out or entertainment may decrease after the baby arrives, there are new expenses too, so parents could cut down on non-essential spending to increase savings.

A good starting point is to first set aside emergency reserves, after which adjustments can be made to expenditure. While the amount invested can vary, as a general rule of thumb, couples should set aside three to six times of their combined monthly income as cash.

Since cash flow may be tight in the first few months after the baby's arrival, couples should explore holding some lower risk investments such as bonds, endowment plans and professionally-managed unit trusts.

It is still important to have a diversified portfolio. However, the earlier couples start planning and saving, the easier it is to achieve their financial goals without resorting to too many high-risk investments such as stocks and derivatives. An early start also gives couples more time to take advantage of dollar-cost-averaging on their investments, where investing in small amounts regularly will lower the average cost of investing over time.

Couples should also take the time to constantly review and rebalance their portfolio. This can be achieved by shifting their investments towards potential income-generating investments. In doing so, it ensures that the family's cash position remains sufficiently liquid.

Saving for a child can be a challenge as couples are also saving simultaneously for retirement, personal aspirations and a new home or car. So couples would benefit from consulting a financial advisor such as Standard Chartered for expert financial planning advice.

PROTECT
Last but not least, couples should prepare for the unexpected. They should look at insurance policies that are flexible and cover pregnancy-specific risks, maternity care and the life of the new baby.

Parents can add on life insurance of five to 10 times their monthly income too, so there is enough to pay for education and expenses if the unforeseen happens to either parent.

The MCYS Children Development Co-Savings (Baby Bonus) Scheme would help defray childcare costs in the early years of parenthood. The cash gift (of S$4,000 to S$6,000) for instance can be used to meet expenses of a newborn or for pre-school education.

With dollar-for-dollar matching for the Children Development Account (CDA) (up to a cap of S$6,000 to S$18,000, until the child is six years of age), parents can use these credits to pay fees of approved institutions or cover the child's medical expenses.

Preparing financially is one of the best things parents can do to make sure they are ready for a baby. After all this planning is done, it is time to sit back, relax and wait for the baby to arrive.