I turned 30 this year, which means that I’ve reached that magical age. Now, whenever I log into Facebook my feed is filled with pregnant bellies and pictures of adorable newborns. It seems like everyone is having a baby.
But not everyone is. Some prefer being childfree and others are only beginning to consider having a baby. Still others are taking out their calculators and adding up the numbers. Can they afford a baby? Or, if they already have a child, can they afford to expand their family?
What they often have the most difficulty with is pinning down exactly how much a baby will cost and knowing how much they should have saved before deciding to start or grow their families. To protect their children, they want to be prepared. But what do they need?
Children Are Expensive
The U.S. Department of Agriculture estimates that the cost of raising a child born in 2013 until they’re 18 will be about $245,340 (more if you consider inflation). That’s a nice chunk of change.
Before the baby even arrives, you need to purchase a crib, a stroller, a car seat and clothes. Then there’s formula, healthcare co-pays and the diapers to consider. On top of all of that, one parent may take unpaid time off work to take care of the child, which can mean a significant cut in family income. If that parent returns to work, the family has to somehow absorb the expense of child care, and that can cost the equivalent of a mortgage payment every month.
So how can you prepare yourself for this financial onslaught so that you can enjoy those precious first months without worrying about money all the time?
1. Make a Baby’s First-Year Budget
Sit down and figure out how much everything will cost. If you’re first-time parents you might not know exactly what you’ll need, but thankfully there are newborn checklists with estimated prices to help you figure it out. After that, you need to decide whether you will be moving to a bigger apartment or house and how long you plan to be with only one income. Don’t forget to factor in how much you might be able to expect your family and friends to help out via baby showers.
You might have to cut back in certain areas to make your budget work or save up to cover the expenses when one of you might not be generating an income. Some of these cuts will come naturally as your life changes to accommodate your new baby. For example, you probably won’t be going out for dinner or to see movies as often as you were before. Practice living on your baby budget for a few months to make sure it’s doable. A budget is meaningless unless you can stick to it.
2. Decide Who Will Stay Home & For How Long
While some families might be able to have one parent stay home until the kids go to school, not everyone has that luxury. Even if both mother and father are eligible for 12 weeks of unpaid leave, it’s not always possible to take it since it would mean going without an income for three months, something which is impossible for most families. Some workplaces offer paid leave, so be sure to check to see what yours offers. Once you have all the facts, decide what makes the most sense for your family and your bank account.
3. Have an Emergency Fund
Anything can happen when you have children. It might take a while for the mother to recover, or there might be complications in delivery not covered or only partially covered by your insurance. Your child may have medical complications of his or her own. This could lead to missed work or expensive health insurance co-pays. Consider keeping some of your emergency money in a Health Spending Account for these types of emergencies.
Other emergencies unrelated to the health could crop up, like your car could need an expensive repair or one of you could be laid off. An emergency fund will help you handle anything that life might throw at you in that costly first year.
How much should you have? Financial planners generally recommend having enough saved to cover the bills for three to six months. If that’s impossible, David Chilton who wrote The Wealthy Barber suggests that you save what you can and supplement it by establishing a line of credit at your bank.
4. Get Life Insurance
One of the most important things you can do for your kids is to get life insurance. It’s not fun to think about, but you could die tomorrow. If you did, would your partner or spouse be able to support your family on their income alone? If the answer is no, then you need life insurance. Picking out the right life insurance is more important than picking out the right stroller.
Experts say that you need coverage worth five to 10 times your income. The good news is if you’re young parents, term life insurance is relatively affordable since the likelihood of one of you dying is quite low. There are benefits from whole life insurance as an investment vehicle so you should consider it if you have a little bit more money to put toward insurance. While you’re at it, make a will. Knowing what will happen to your children if both you and your spouse die will give you peace of mind.
5. Include a 529 Plan in Your Budget
Getting post-high school education is expensive now, so imagine what it will cost when your baby goes to school. Start saving early with a 529 Plan and let the miracle of compound interest do its magic. Put money into it every month, even if all you can afford is a small amount.
Encourage friends and family to make contributions instead of buying presents for your child’s birthdays. Kids often get more toys than they need, and they will appreciate the gifts far more when they’re older and have money for school. Be sure to research the best 529 plans before choosing one so that you pick one that will perform well and maximize your investment.
6. Factor in Tax Breaks
So far, I’ve only talked about the costs of parenting but what about the tax measures in place to help parents? You need to factor those into your budget as well to get an accurate idea of the financial picture for baby’s first year. The child tax credit provides a $3,500 exemption (though it phases out as income rises) for each dependent you have, and low-income families may qualify for more.
On top of this, you can create a flexible spending account (FSA) through your employer to cover child are costs, which will allow you to put your pre-tax earnings toward this major expense. If your child care costs exceed the amount you’re allowed in your FSA, or it makes more sense for your family’s situation, you can also claim the Child and Dependent Care Tax Credit which gives you a 20% to 35% tax credit for up to $3,000 in child care expenses if you have one child, and for up to $6,000 in child care expenses if you have more.
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Image: George Doyle