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 of them are just thinking about it. Others are taking out their calculators and adding up the numbers. Can they afford to have a baby? Or, if they already have a child, can they afford to have another one?
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 broods. To protect their families, they want to be prepared. But what do they need?
Children are Expensive:
It was estimated by the U.S. Department of Agriculture in 2011 that the cost of raising a child until they’re 17 is about $234,900. If you divide it by 17 years, that’s $13,817 per year. That’s a nice chunk of change.
Before the baby’s even born you need to purchase a crib, a stroller, a car seat, and clothes. Then there’s formula, health care co-pays, and the diapers to consider. On top of all of that, usually one parent will take unpaid time off work to take care of the child which can sometimes cut the family budget in half. If that parent returns to work, the family then has to somehow absorb the expense of childcare which can sometimes 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
Before you get pregnant, 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 your baby shower.
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 much as you were before. Practice living on your baby budget for a few months to make sure that it’s doable. A budget is just numbers unless you can stick to them.
2. Decide How Long and Who Will Stay Home
While some families might be able to have one parent stay home until the kids go to school, not everyone has that luxury. While both mothers and fathers have 12 weeks of unpaid leave available, 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 baby might be born premature and 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 non-life threatening emergencies 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 3-6 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
The most important thing 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 ten times your income. The good news is that if you’re young parents than 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 towards insurance. Also, while you’re at it consider making 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
The cost of an education is expensive now, so imagine what it will cost when your baby goes to school? Start saving for their education early with a 529 Plan and let the miracle of compound interest do it’s 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 for each dependent you have and you can also claim additional money depending on how much you make.
On top of this, you can create a flexible spending account (FSA) through your employer to cover childcare costs, which will allow you to put your pre-tax earnings towards this major expense. If your childcare 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 Childcare Tax Credit which gives you a 20% to 35% tax credit for up to $3000 in childcare expenses if you have one kid and for up to $6000 in childcare expenses if you have two or more.
7. Waiting Too Long Could Cost You
While you should do all you can to prepare financially for having kids, be careful not to wait too long. It becomes much harder to conceive and carry a healthy baby to term after a woman turns 35 and that might mean complicated and expensive fertility treatments. The costs of IVF can be astronomical and you might need more than one round.
While adoption is also an option, it can often be expensive as well and some families feel that it’s important to have their own biological children.
It’s all Worth It
While not everyone can be in perfect financial shape before having children, it will help ease your worries if you do everything you can to prepare for the first year. With many families already facing financial pressure, the question of whether or not to have another child can often be a difficult one.
I, for one, selfishly hope that the friends who are weighing the financial pros and cons of having children decide to go ahead with it. I need more cute kids to dote on both in person and in my Facebook feed.
*Please note, this post first appeared on Credit.com and was syndicated to other outlets.