Preparing Your Finances for Parenthood: Expert Advice for a Smooth Parental Leave

Preparing for the financial impact of parental leave can be a daunting task, so when this question came in from my network, I wanted to ensure I was providing sound advice for parents-to-be.

I brought in an expert - Stephanie Pow, the founder of Crayon and mother-of-two, who shares her best advice for getting on top of your finances before your little one arrives.

Dear Parent Code-Cracker,

What strategies can I use to manage my finances effectively during parental leave?

Take it away, Stephanie:

“With income dropping and expenses rising simultaneously, it’s no wonder many new parents feel financially stressed.”

Juggling impending parenthood and work is challenging enough, and it might even be tempting to close your eyes and hope for the best. In fact, there’s a name for our tendency to tune out at the very times we need to pay attention: The Ostrich Effect. 

At Crayon, we understand the challenges of impending parenthood and the strain it can put on your finances. While we have a detailed baby gear list with a built-in budget designed to help you spend wisely, you might be surprised to learn that the highest costs of parenthood aren’t the fancy buggy or robust car seat. It’s the income you don’t earn, the superannuation contribution you don’t receive, the unexpected expenses you don’t plan for and the childcare costs you often don’t look into until you’re well down the road. 

But don’t worry, the good news is that unlike sleepless nights and endless diapers, there are steps you can take to prepare your finances better. 

• Figure out your estimated income on parental leave 

Both the Australian and New Zealand governments offer paid parental leave, which is close to the minimum wage. In both countries, you need to meet an employment test, and in Australia, there is also an income test. 

Your employer may also offer additional benefits for both primary carers and partners. Organisations have their own eligibility requirements to access these benefits, which can differ from the government requirements, including length of service, type of contract (typically permanent staff only), and bonding (you may need to pay some or all of it back if you don’t return). 

If having a child is on your radar, it’s worth looking into this now so you don’t get caught out by the rules. Our New Zealand Parental Leave Register provides the parental leave policies of over 200 employers, covering one in every six working Kiwis. 

• Decide what you’ll do about your superannuation/KiwiSaver

In Australia and New Zealand, superannuation/KiwiSaver contributions cease on parental leave unless you make voluntary contributions. This can shave thousands off your retirement nest egg in the long term. 

To use an NZ example, if you earn the national median income of $62,000, with a default 3% employee contribution and compulsory 3% employer contribution to your KiwiSaver, taking 12 months of parental leave means missing out on $3,100 in contributions. Over a 30-year period, that amount invested in a default balanced fund (using an FMA-prescribed assumption of 3.5% after tax and fees) could potentially grow to $8,900 by the time you retire. 

From 1 July 2024, the NZ government will make the equivalent of ‘employer’ contributions on paid parental leave if you also contribute. However, since most people outearn the maximum government-paid parental leave amount, there will still be a gap. Politicians are also tabling a proposal in Australia.

Your options to address this are:

• Check your employer’s policy, as some make partial or full top-up contributions

• Contribute more when you’re earning

• Make voluntary contributions during parental leave (something to factor into your budgeting and talk to your partner about)

You can learn more in KiwiSaver: Bridging The Parental Leave Gap by Crayon.

• Building a ‘peace of mind’ fund for unexpected expenses 

Spoiler alert: the cost of raising a child until the age of 18 is estimated to be around $160,000. 

And even the best budgeters won’t be able to forecast all the curveballs that come your way. Building up a dedicated emergency fund for child-related expenses can help cushion those costs and keep your savings plans on track. Start small and keep it simple - putting aside just $20 a week over a year will get you $1000. 

Additionally, consider investing in a fund for your child's future. Starting early can give them a head start, no matter what adventures lie ahead. For more insights on investing for your child,  check out Crayon’s five-part guide on investing for your child.

• Look into childcare ASAP

Childcare is often the most significant cost in the early years of parenting With options ranging from free to over $100 per day and some waiting lists exceeding a year, this is definitely something to consider while you’re pregnant. Not only will this give you greater financial clarity, but securing a spot at your preferred daycare option will make your transition back to work and the parent guilt that often accompanies it much easier. 

Crayon spoke with childcare expert and Kindello founder Logan Whitelaw about his top tips for finding a good centre. Although it’s specific to the New Zealand market, the general points still apply to Australian parents.

If you’re on the fence about returning to paid work, Crayon breaks down what to consider beyond comparing your income to childcare costs.

• One last thing…

“Being a new parent is joyful. It’s also exhausting, challenging and sometimes just plain tedious. I wasn’t surprised at all when I recently read that parents get less than 30 minutes of 'me time' a day.” 

As the saying goes, you can't pour from an empty cup. It's something that's often overlooked when budgeting for a child, but a financial reserve for your well-being will help you become the parent you want to be. 

Have a think about what you need to recharge - maybe it's a cleaner to lighten the load, a massage every once in a while, or a babysitter for a regular date night (or just to go to a cafe to drink a beverage while it's still hot and read a book - a novelty as a new parent!)

Managing your finances as a new parent doesn't have to be overwhelming. By taking proactive steps and planning ahead, you can reduce stress and welcome more precious moments with open arms. 

For more free articles and tools on the smart money moves you can make as a parent, check out Crayon’s website. If you’d like more hands-on guidance, Crayon also offers a Financial Baby Prep Program with private sessions, custom-built tools and online resources.