Cost of raising a child is highest in year they turn two, reaching £17,600: How to plan and save

The terrible twos, renowned for temper tantrums and meltdowns, is also typically one of the worst years for parents’ finances, new research has revealed.

Children aged between one and three cost the typical household £17,605 a year, according to a study by NatWest Premier.

The bank revealed that the cost of raising a child for 21 years typically ranges between £7,984 to £17,649 per year.

The average total cost of raising a child from infancy to adulthood was found to be £214,000.

The research looked at all the costs involved in raising a child, including the loss of salary during maternity leave, childcare payments, pocket money and even driving lessons.

It found that the biggest financial pinch point for most parents comes once they are back at work following maternity or paternity leave, but before the child is eligible for the Government’s free childcare hours.

It’s therefore perhaps unsurprising that children aged between one and three cost the most to clothe, feed and care for.

After this parents get some financial respite, with the average cost dropping to just over £9,000 when the child turns three.

After the age of 11, when children no longer require childcare after school, the cost of parenting drops again to an average of £8,000 a year, despite increased spending on things like food, extra -curricular activities, mobile phones and pocket money.

However, costs then rise again as many parents face expenditures such as the latest fashion items and other teenage ‘must haves’.

At aged 15, teens become even more expensive, with parents forking out a five-figure sum – £10,830 on average – thanks to the increased cost of leisure activities, clothing and pocket money. 

The parents of students also face supporting them at university even once their children are over 18. 

Unfortunately for most parents, the cheapest time in their child’s life will coincide with their own maximum earning power, when they are aged between 40 and 49 years. After this age, average salaries tend to decline.

What’s more frustrating is the fact that the most expensive years often occur for parents in their early thirties when their incomes are still growing.

They may also be facing the highest mortgage costs, with the average age for a first-time buyer now 32.

Laura Newman, head of private client advice and investment at NatWest Premier, says: ‘New parents often assume that children get more expensive as they get older. 

‘In fact, our research shows that the cost of raising children dips dramatically from the age of three, only to rise again just before their GCSEs.

‘The total cost of raising a child might seem alarming, but by knowing when the financial pinch points will come, parents can plan a strategy that will help them to pay for the pricier years.’

How to budget for raising a child 

The research found that roughly half of parents wish they had been better prepared for the cost of raising a child.

As parents struggle to cope with rising living costs, planning for a child’s future may be easy to put off. However, there is no escaping the importance of doing so.

In order to plan, creating a budget first and foremost is the first step. Budgeting at its simplest is about checking incomings and outgoings.

A child between the ages of one and three typically costs around £17,600 a year to raise – a figure that dips dramatically to just over £9,000 when the child turns three

Laura Newman, head of private client advice and investment at NatWest Premier says: ‘It’s really difficult to think about having any additional money to save in this environment, but having a budget really does help.

‘Start by considering the essentials and then any discretionary spend. Build a savings pot to cover planned future expenses and also an emergency fund to cover unforeseen eventualities.’

Where to save 

The general rule of thumb is that any money being put aside now, that will be required within the next five years, would be best kept in savings.

Easy-access savings will typically enable parents to access their funds as and when they need, but some accounts do come with restrictions, so always check the small print. 

The best easy-access savings accounts are currently paying between 2.4 per cent and 3 per cent interest. These will be the best place for the emergency fund or any cash that might be required in the short term.

– Check out our independent best buy easy-access rates here.

For those able to put down lump sum amounts to help with particularly expensive years further down the line, fixed rate savings offer the highest returns without the risk that comes from investing.

The best-paying one-year fix pays 4.4 per cent, the best two-year fix pays 4.85 per cent whilst the best three year fix pays 4.9 per cent, for example.

– Check out the best fixed rates here. 

For those who would prefer to use a cash Isa to avoid paying tax on the interest they earn, it is possible to earn up to 4.45 per cent on a fixed rate cash Isa and 2.7 per cent in easy-access.

– Check out the best cash Isa rates available here. 

‘Get the balance right,’ says Newman. ‘To ensure you’re financially resilient, try and have some money in an easy-access account for emergencies before putting any money away for the future.

‘For milestones happening in less than five years’ time, keep the money in cash, perhaps in a fixed-rate bond to ensure you get the best rates and aren’t tempted to spend it.’

Planning for the long term 

The NatWest study revealed that a quarter of parents believe the most costly expenditure of raising a child will be higher education, while 15 per cent think it will be the cost of extracurricular activities such as trips away, sports or music lessons. 

A similar proportion believe that helping towards a deposit for a first home will be the most expensive milestone. 

The tax protector: You can think of an Isa as a shield that protects your savings or investments from being subject to taxation

Newman of NatWest Premier believes parents need to plan in advance for the ages at which different costs are likely to increase.

She says: ‘If you know that the period before your child is eligible for funded childcare hours is going to be the tightest, it makes sense to save for that future expense.

‘When you have longer before an expensive milestone, you can focus on building up a savings or investment pot with monthly contributions, relying on compounding to help them to grow.’

For those able to invest for costs further down the line, such as university costs or a house deposit, investing into a stocks and shares Isa could be a sensible option.

Any UK resident aged 18 or over can invest up to £20,000 in a stocks and shares Isa each tax year – and doing so will protect any income or capital gains from the taxman.

Those investing outside an Isa will often receive dividends from their investments. Although there is currently a £2,000 personal allowance once their dividend income exceeds this in a given tax year, they will start paying tax.

At present, basic rate taxpayers are taxed at 8.75 per cent whilst higher rate taxpayers are taxed at 33.75 per cent.

Any stocks and shares sold outside an Isa will also be subject to capital gains tax, although there is a personal allowance of £12,300 a year for this.

Capital gains tax can be charged on any profit made on an asset that has increased in value, when someone comes to sell it.

For stocks and shares they will be charged 10 per cent if they are a basic rate taxpayer and 20 per cent if they are a higher rate taxpayer.

It therefore can be very beneficial to use an Isa to avoid these costs, particular as investments are likely to snowball over time.

Outside of an Isa, your investments may become liable to taxes on dividend and capital gains.

Newman says: ‘Investing money makes sense, especially if you will not need the money until your child is at secondary school, or even university.

‘Savings rates might have grown lately, but inflation has as well, meaning that the value of your money could be reduced significantly by the time it is needed.

‘Setting up a monthly direct debit is often the easiest way to ensure you save towards your targets.

‘Putting away even £50 a month into a stocks and shares Isa offers potentially greater growth where you have five years and longer to save.

‘If you’re thinking of helping your child with a house deposit, you have even longer since they may not buy until they are in their 30s.

‘Over time, we know that stocks and shares usually outperform cash savings and mean that your child’s nest egg hopefully won’t be reduced by inflation.’

How to start investing for a child’s future

Those looking for the most cost-effective way to invest may wish to consider online DIY investing platforms, as most of these include the option to invest in an Isa.

When weighing up which one to go for, it’s important to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.

This is Money has written an extensive guide on the best and cheapest DIY investing platforms, which might help you decide.

Investing: Those who are able to save or invest for the long term might be better off turning to the stock market to try and outperform inflation

Newman adds: ‘Select the right investment approach for your needs. This is important as having a well-diversified investment fund can help manage the ups and downs of unforeseen future events.

‘Taking advice here can be the right thing to do, or alternatively using a reputable online investment tool that allows you to educate yourself and in some circumstances provides advice suitable to your circumstances.’

Should you get a Junior Isa?

An alternative option for parents looking to put money away on behalf of their children for the long-term is to consider a Junior Isa (Jisa). There are both cash Jisas and stocks and shares options. 

Jisas can be opened for anyone aged under 18 living in the UK, and parents can contribute up to £9,000 each tax year.

They work in the same way as an Isa. However, the key advantage being that the £9,000 allowance is separate from an adult’s personal Isa allowance. 

It means that parents won’t be using up their own annual tax free allowance, currently £20,000, when contributing into it.

However, parents need to be aware that once the child turns 18, the Jisa becomes their child’s money to do what they like with. 

So whilst the money may be intended to be used for university or a house deposit, the child may have other ideas – and as the account is in their name, their parents are technically unable to stop them. 

Newman adds: ‘A Junior Isa will help build up a tax-efficient nest egg for your child but bear in mind the money becomes theirs when they turn 18, and it might not be spent in the way you hoped.

‘If you aren’t happy with this, you could use your own Isa allowance to create a nest egg to pass on later – everyone has £20,000 a year they can pay into an Isa, which can go into stocks and shares or cash.’

How to start a Jisa

There are fewer Jisa providers than for adult Isas. However, there is still plenty of choice.

– Find the best rates available on cash Junior Isas using our independent best-buy tables

Most DIY investing platforms offer a stocks and shares Jisa service, including Hargreaves Lansdown, AJ Bell, interactive investor and Fidelity.

A number of online investment management services such as Nutmeg, Wealthify and Moneyfarm also offer a Jisa service.

These will invest on your behalf in accordance with your personal risk profile.