Financial planning strategies for new parents
Babies are a cause for celebration. However, bringing a beautiful child into this world also comes with making sacrifices. Some new parents might have forgotten what sleep feels like, while others get a shock in the mirror when they see how fatigued they look. The lack of sleep is just one of the struggles we have as we juggle our newly minted parenthood responsibilities.
With the weight of our young family on our shoulders, it is critical that we plan and prioritise our energy and resources to achieve the best outcome for our loved ones. In this article, we focus on how we can strategise on financial planning as new parents.
Cost of raising a child in Hong Kong
In 2006, Hong Kong’s Olympic windsurfing champion Lee Lai-Shan famously said in a television commercial for a local bank that it would take HK$4 million to raise a child in Hong Kong, which caused a commotion to the city at the time.
A recent update to the survey in 2023 by the same local bank said the cost for a middle class family to nurture a child until 22 years old had now risen to HK$6 million, taking inflation into account.
According to a similar study, the breakdown of the HK$6 million could roughly be classified into the below categories:
Education is the largest spending category, with the study showing many children of Hong Kong middle class families usually start attending playgroups and pre-school preparatory classes as early as one year old.
The cost of attending semi-private, private or international kindergartens, elementary and high schools in Hong Kong ranges from HK$3,000 to as high as HK$15,000 or more a month.
The study also pointed out that the estimate might jump to HK$6.9 million if parents decide to send their kids abroad for higher education.
Although the above estimate might serve as a guide, the actual cost of raising a child could vary widely, owing to the myriad of factors that could influence a family’s expenses — from insurance coverage to holidays, parenting styles and child’s needs, etc.
Financial planning for the family
One key thing to note is that the cost of raising a child does not necessarily have a fixed pattern to it — it does not increase linearly, nor remain constant.
As new parents, you are likely to face the challenge of having your children as well as elderly parents/in-laws as dependents. Therefore, beyond fire-fighting for day-to-day expenses, it is also important for you to plan for both your and your child’s longer term financial needs.
Financial planning involves goal setting, budgeting, saving as well as investing wisely. Let’s take a look at the different steps you can take to start planning for your family expenses and goals.
Detail your expenses, household budget and goals
With a new child comes new expenses. It will be helpful to plan your finances in advance to understand what “upfront costs” might be temporary in the short-term (e.g. diapers, new-born confinement nanny) and other recurring costs that might impact your household budget in the longer-term (e.g. clothing and food).
Besides day-to-day expenses, are there other goals you hope to achieve for yourself and your family, whether it be a family vacation or a new family home. Drop these down and estimate the cost for each of these goals.
Once you have determined your budget and goals, you can then know what is required to be set aside each month and can create the appropriate investment and savings plan to achieve them.
Read more: Prioritising your financial goals
Start early to invest for your kid’s long-term education fund
Higher education is likely to be the largest lump-sum outflow when raising a child.
According to the Joint University Programmes Admissions Systems (JUPAS), the tuition at the 8 universities in Hong Kong is about HK$42,100 per year. For a 4-year programme, the total cost would amount to approximately HK$168,400, excluding other living and extracurricular expenses.
Many Hong Kong parents also opt for sending their children overseas for a differentiated experience. The following are estimated budgets for studying at universities in popular study abroad destinations, which are generally multiples higher than local tuition fees.
For many, traditional insurance savings plans may seem attractive due to low investment risk and how payouts are structured to meet cash flow needs to pay off the tuition fees, but they typically have early withdrawal penalties and lower returns.
Alternatively, you can get started building a long-term core, diversified portfolio of funds early on. For example, if you begin contributing HK$5,000 per month to an investment portfolio that yields 6% per annum, in 18 years’ time, with the power of compounding, the portfolio would have grown to HK$2.1 million.
Through Endowus, you can choose a portfolio of choice based on the risk tolerance of your investment goals. And unlikely insurance savings plans, if your financial needs change, there is no lock-up or termination fees when you redeem your investment.
Read more: Consider “Buy term, invest the rest" strategy
Keeping an emergency fund
Having a child also raises the stakes for “rainy day” planning to ensure you have a pool of money set aside for expenses from unexpected events such as hospital bills or the financial burden from an unexpected job loss.
A general rule of thumb is that your emergency fund should be able to cover at least three to six months’ worth of expenses. This money does not necessarily have to be sitting in a single non-interest bearing checking account, you can consider spreading this funds across relatively conservative and liquid investments such as money market funds or cash management portfolios.
Read more: A rainy day fund: Why every Hong Konger should have one
Take that first step, no matter how small
Parenting can be one of the most rewarding experiences in one’s life. Even though raising children is neither cheap nor easy, we can try to tilt the odds in our favour by starting the process of financial planning earlier rather than later, so that we can benefit from the power of compounding.
Perhaps more importantly, we need to instil in our children good values in life so that they can be good custodians of money for the future generations.
With digital wealth platform Endowus, you can plan and manage your money — by investing in Best-In-Class Funds and globally diversified, low-cost model portfolios seamlessly.
Click here to get started on your investing journey with Endowus Hong Kong today. If still in doubt, feel free to schedule a free consultation with our SFC-licensed client advisors to start curating a personalised investment plan for yourself, your family and your children.
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