Ready, Set, Baby! Financial Planning Tips For Parenthood
By Susan Doktor
The joy I felt when I was expecting my first child—or children, as it turned out, because I gave birth to twins—was unlike any feeling I’d ever experienced before. I remember painstakingly picking out fabrics for the handmade quilts I commissioned for my son’s cribs. Fantasizing and eventually agonizing over what to name my boys. (For a while, before we knew they were boys, we called them Mango and Kiwi—go figure.) We documented my ever-growing belly with monthly photos. We listened at home to the babies’ heartbeats with a fetal stethoscope, mostly for the fun of it, but also because I was the proverbial Nervous Nelly as my due date approached. Our anticipation of meeting our kids for the first time was exquisite. But it was tinged with anxiety. What exactly were we getting into? I’ll give you a hint. It’s wasn’t all booties, bottles, and baby bouncers.
Becoming a parent is transformative. The most profound I experienced was realizing selfishness no longer had a place in my life—at least as it concerned my kids. Their needs came first, in both simple and profound ways. Dragging yourself out of bed at an ungodly hour when one of your kids whimpers in his or her crib is just the beginning. You’ll find yourself thinking about safety and security more. And if you want to give your children a rich, rewarding life, chances are you’ll have to become more mindful of finances than you’ve ever been before.
Raising kids is expensive and many parents don’t take the time to understand the financial commitment they’re taking on before they plunge in. Are you thinking of becoming a parent? Have a baby on the way? It’s time to prepare yourself. Not just by designing an adorable nursery or laying in a bunch of onesies, as fun as that may be, but by taking into account the full measure of your responsibilities, including your financial obligations. Most parents need some help in figuring out the money part of being a mommy or daddy. Experienced parents—your own might be a great resource—can help you get a realistic picture of what you’re taking on when you agree to care for a largely helpless human until he or she is self-sufficient. A financial advisor can also be your ally. And you can start with this simple checklist. To borrow a phrase from a wildly popular parenting book, here’s a little of what to expect when you’re expecting.
Let’s start with some overarching figures. According to the USDA, nowadays it costs just under $13,000 per year to meet a child’s basic needs for food, shelter, medical care, clothing, and transportation. Throw in a few toys, music lessons, and summer camp and you can see how that figure may not cover all the things you want your child to have. So consider that average a very conservative figure. Your expenses will certainly be higher than average if you live in an urban area. And some years are more expensive than others. Experts advise that as your children get older, it costs more to raise them, topping out between the ages of 15 and 17. That is, unless you send your kids to college. More on that in a minute.
Regardless of whether you raise your child as a single parent or as part of a couple, it’s very common for new parents to find themselves squeezed for space. A crib, a dresser, and a changing table alone can overtax your living space. True, many parents do tough it out when their children are babies by installing a cradle or bassinet in their bedrooms and improvising elsewhere. But there will come a time—sooner than you think—when you’ll need a larger apartment or home. So if you haven’t already begun to save money to put towards a higher rent bill or a down payment on a home, today isn’t too soon. If you plan to purchase a home, it’s critical to understand all of the costs of homeownership, too. On average, about 29% of the cost of raising kids is spent on housing—the single largest line item in the baby budget.
The very first call you make after your child is born—after you’ve shared your good news with family and friends, of course—should be to your health insurance company. Get that baby covered! According to the USDA, healthcare accounts for about 6% of the annual cost of raising a child. That includes health insurance premiums and out-of-pocket costs. I’m not going to mince words here: if your family doesn’t have health insurance, you’re simply not prepared to be a parent. If you can’t afford private health insurance, it’s essential that you contact the agency in your state that manages Medicaid. While dealing with bureaucracy is rarely pleasant, applying for Medicaid is a straightforward process. Don’t let it intimidate you. Your baby is counting on you.
It’s hard to overstate the joy that comes with being a new mom or dad. Unfortunately, there’s always a wet blanket in every crowd—and today it’s me. In the midst of experiencing or anticipating all that joy, I’m going to make ask you to answer a very sad question: what will happen to your baby if you die? And I’m going to ask you to think about life insurance.
You can’t protect a child who loses a parent from grief. But you can avoid heaping more misfortune and stress on a grieving kid by preventing him or her from experiencing financial hardship. That’s where life insurance comes in. Like health insurance, it’s a critical safety net every parent must provide for their children. Unfortunately, in the US, we don’t have government-funded life insurance. You have to pay for it. Many employers offer low-cost term life insurance as part of their employee benefits package. But even if yours doesn’t, life insurance is relatively inexpensive when you’re young and healthy. Figure those premiums into your monthly budget, just as you do your car insurance. Nobody likes to pay for insurance. But you owe it to your kids to protect them. And you’ll have a little bit more peace of mind, knowing your kids won’t have to worry where their next meal, their new bicycles, or their college education is coming from.
All new moms and dads have a lot on their minds. But working parents have the extra burden of juggling both professional and family responsibilities. Having a baby will put new career and financial pressures on you. Maternity and paternity leaves are inevitably too short. Bosses aren’t always so understanding when you have to leave early for a pediatrician appointment. And professional childcare costs money. Depending on the age of your kids and the type of care you choose, you’ll probably spend between $200 and $500 per week to have someone look after your kids while you’re at work. But there is a pale silver lining when it comes to daycare and in-home child care expenses: it’s called the Child and Dependent Care Tax Credit. Unlike a tax deduction, which simply allows you to reduce the amount of income you pay taxes on, the Child and Dependent Care Tax Credit puts a portion of your qualifying childcare expenses back in your pocket. So be sure to save your receipts religiously and have someone knowledgeable about tax code prepare your federal tax returns.
How important is a college education? On average, workers who have a bachelor’s degree earn twice as much in their lifetimes as workers with a high school diploma. If you want your kids to have a financial leg up throughout life, helping them get a college degree is the way to go. But paying for our kids’ college education is one of the costliest responsibilities parents take on. The cost of a 4-year degree from a public university is upwards of $40,000. A degree from a private college can cost $200,000 or more. Needless to say, if you hope to see your kids earn an undergraduate degree, right now is a great time to start saving.
But don’t just sock the money in a savings account. Talk to a banker or a financial advisor about opening a 529 college savings account for your child. These investment accounts can make your savings grow faster. And the money you earn from your investment isn’t subject to federal income tax—so long as you eventually use your earnings to pay for college. Some states waive income tax on 529 plan earnings, too.
We’re not born knowing about money. And few schools emphasize financial literacy as much as they arguably should. So if you aren’t much of a money manager right now, cut yourself some slack. But becoming a parent puts the onus upon us to worry not only about our own financial well-being, but our kids’ needs, as well. And that may mean going back to school for a crash course in personal finance. The good news is that there are many free resources available, both online or through a public institution near you, to help you become more financially literate. And what’s even better? Financial literacy is something you can pass along to your kids. Just like you teach them to tie their shoes, clean their rooms, and mow the lawn, you can hand down financial skills that will help them take care of themselves—and who knows, maybe even your grandchildren.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a wide variety of subjects including personal finance and family matters. Follow her on Twitter @branddoktor.