This is a five part blog series focused on the finan­cial aspects of hav­ing chil­dren.  Specif­i­cal­ly, the issues one should con­sid­er pri­or to bring­ing a child into a fam­i­ly.  This is part two, Bud­get­ing for Baby. To read the first, Hav­ing the “Seri­ous” Talk, click here.  The last three blogs will be pub­lished at one week intervals.

 

Develop a new spending plan

Bring­ing a new baby into the fam­i­ly is a fan­tas­tic oppor­tu­ni­ty for you to set up a new bud­get or review an exist­ing one.  You will ini­tial­ly need to cre­ate a spend­ing plan.  You’ll have to con­sid­er the impact that your child will have on your liv­ing expens­es as well as account for any shift in income that might occur if you decide to quit your job. You’ll also need to save more mon­ey to ensure that your fam­i­ly has mon­ey to meet its future needs.

 

Initial expenses

The ini­tial out­lay for your baby can be quite high. You’ll have to equip your home with baby fur­ni­ture, a stroller, a high chair, an infant seat, a car seat, bed­ding, and cloth­ing, among oth­er items. You could spend well over $1,000 equip­ping your home with just the basics, and many new par­ents spend a lot more.  Accord­ing to a 2012 USDA report, the aver­age mid­dle-income fam­i­ly, those mak­ing between $60,640 and $105,000, will spend rough­ly $13,650 on child relat­ed expens­es per year.  For those mak­ing over $105,000, expens­es will aver­age $23,100 per year.  Not only that, but expens­es increase as the child gets older. 

Budgeting for babyHow­ev­er, you can con­trol your expens­es.  When you’re shop­ping for the baby you’re expect­ing, try to sep­a­rate emo­tion from need. Of course, you want your baby to have the best, but you don’t real­ly need the best in most cas­es. Your baby won’t look any cuter in that $1,000 crib than he or she will look in the $200 one, and many par­ents can tell sto­ries about the top-of-the-line stroller he or she bought then found was too heavy to push eas­i­ly. The best way to pro­ceed is to ask oth­er par­ents for rec­om­men­da­tions, then shop around. Usu­al­ly, you don’t have to sac­ri­fice qual­i­ty to save mon­ey. If you start shop­ping far enough ahead, you can find good deals in dis­count stores, depart­ment stores, and super­stores. You can also look for items in thrift stores, con­sign­ment shops, and yard sales, although find­ing clean sec­ond­hand items in good con­di­tion can be a chal­lenge. Ask friends and rel­a­tives, too, if you can bor­row baby items that they’re not cur­rent­ly using. If your friends are throw­ing you a show­er, ask for items you need.

Tip: Don’t buy more than you ini­tial­ly need for your baby, because you may find that what you thought you need­ed, you real­ly don’t. In addi­tion, your friends and rel­a­tives may show­er you with gifts once the baby is born or comes home, and you won’t need to buy as much as you thought you would. In par­tic­u­lar, don’t go over­board buy­ing clothes until you can gauge how rapid­ly your baby will grow. One thing you def­i­nite­ly should buy is a car seat. Many hos­pi­tals won’t let you leave with­out hav­ing one, although they may loan you one temporarily.

 

Expenses that typically increase when you have a baby

(all esti­mates are approximate)

  • Your gro­cery bill: Dia­pers and for­mu­la (you may use some even if you’re breast-feed­ing) are very expen­sive, adding approx­i­mate­ly $100 or more to your month­ly gro­cery bill. Lat­er, when your baby turns to sol­id food, you’ll have to fig­ure in the cost of baby food. 
  • Your hous­ing costs: If you don’t already live in a house or large apart­ment, you may find your­self mov­ing once your baby gets old enough to take up a lot of space with toys and equip­ment.  And don’t for­get the gad­gets; baby mon­i­tors ($25), chang­ing table/pad ($125), gates ($35), crib ($200), etc. 
  • Your trans­porta­tion costs: If you have a small car or a two-seat con­vert­ible, you may find it dif­fi­cult to fit in a car seat, and you may need to buy a new car. Or, if you have an old car, you may want to buy some­thing more reli­able now that you have to wor­ry about your baby’s safe­ty.  And don’t for­get the car seat ($125).
  • Your cloth­ing and house­hold expens­es: You’ll find your­self spend­ing less on your­self and more on your child now that your bud­get has to stretch. You’ll spend a lot ini­tial­ly to buy essen­tials for your child and then spend a bit more each month than you’re used to for items your child needs.
  • Med­ical expens­es: You’ll prob­a­bly pay a co-pay­ment for each of these trips unless your health insur­ance plan cov­ers 100 per­cent of well-baby care. Your health insur­ance pre­mi­um will like­ly dra­mat­i­cal­ly increase as well, unless you already had fam­i­ly cov­er­age for you and your spouse.  Pre­na­tal care can cost up to $2,000, hos­pi­tals can cost over $15,000 and don’t for­get the child­birth class­es ($50-$200 per class).
  • Cost of child care: Whether you look for full-time day care or hire an occa­sion­al baby-sit­ter, you need to plan for the impact this will have on your bud­get.  The actu­al costs vary con­sid­er­ably so more on that in a minute. 

On-line baby cal­cu­la­tors can help in you in devel­op­ing a com­pre­hen­sive spend­ing plan.  The USDA has a cal­cu­la­tor that will help par­ents esti­mate how much it could cost to raise a child.  It can be found at:   http://www.cnpp.usda.gov/calculatorintro.htm.  Oth­er cal­cu­la­tors can be found at Babycenter.com , bankrate.com, and WebMd.com.

 

Costs of day care

The cost of day care will depend on where you live, how many chil­dren you have in day care, how old your chil­dren are, and what type of child care you choose.  If you are like many work­ing peo­ple, you will pay for your child-care costs out of cur­rent cash flow.  Child care will be a part of your reg­u­lar month­ly expens­es and gen­er­al­ly can­not be avoid­ed.  How­ev­er, some meth­ods are avail­able to you that may help save on tax­es and reduce costs.  For instance, your employ­er may include a des­ig­nat­ed flex­i­ble spend­ing account (FSA) in its employ­ee ben­e­fits pack­age.  You con­tribute pre­tax dol­lars, deduct­ed from your pay­check, to fund ear­marked for depen­dent care expens­es.  You pay your day-care bills and are lat­er reim­bursed out of your tax-free FSA. 

You and your part­ner can more eas­i­ly meet your child-care expens­es by reduc­ing costs.  Some child-care providers allow par­ents to vol­un­teer their ser­vices in exchange for a low­er bill.  Or, if pos­si­ble, you and your part­ner can work alter­nate work sched­ules so that at least one of you is home with your child for all or part of the day.  Oth­er options are job shar­ing with anoth­er per­son, com­press­ing the work week by work­ing 4, 10 hour days vs 5, 8 hour days or going part time until the chil­dren are in all day school.   Part 3 of the Hav­ing Chil­dren blog series, Are You Going Back to Work, will focus more on this concept. 

 

Saving for education

It’s wise to begin sav­ing for your child’s edu­ca­tion as ear­ly as pos­si­ble. Col­lege costs keep climb­ing.  Next to home buy­ing, it may be the biggest pur­chase you ever make.  Accord­ing to the Col­lege Board, for the 2013/2014 school year, the aver­age cost of one year at a four-year pub­lic col­lege is $22,826 (in-state stu­dents) and $44,740 at a four-year pri­vate col­lege.  Though no one can pre­dict what col­lege might cost 15 years from now, annu­al price increas­es have his­tor­i­cal­ly ranged between 4 and 7%. 

There are sev­er­al sav­ings options, but to come out ahead in the col­lege sav­ings game, you should opt for tax-advan­taged strate­gies when­ev­er pos­si­ble.  529 plans are one of the most pop­u­lar tax-advan­taged options.  They include both col­lege sav­ings plans and pre­paid tuition plans.  Your con­tri­bu­tions grow tax deferred and earn­ings are tax free at the fed­er­al (and some states) lev­el if the mon­ey is used for qual­i­fied col­lege expens­es.  Anoth­er option is con­tribut­ing to a Coverdell edu­ca­tion sav­ings account.  This vehi­cle lets you con­tribute up to $2,000 per year and your con­tri­bu­tions grow tax deferred and the earn­ings grow tax free at the fed­er­al lev­el if the mon­ey is used for qual­i­fied ele­men­tary, sec­ondary or col­lege expens­es.  Oth­er options in include, U.S. sav­ings bonds, and UTMA/UGMA cus­to­di­al accounts. 

 

Saving for emergencies

If you don’t have an emer­gency fund, now is the time to set one up. If your child gets sick, your car breaks down, you need to move unex­pect­ed­ly, or you lose your job, you can dip into your emer­gency account. An emer­gency account should nor­mal­ly con­tain an amount that equals three to six months’ worth of liv­ing expenses. 

Since you may need these funds imme­di­ate­ly, it is best to keep these funds in a tra­di­tion­al sav­ings account or a mon­ey mar­ket deposit account.  That way, the cash will be read­i­ly avail­able when you need it. 

Final­ly, keep your emer­gency fund sep­a­rate from your every­day accounts.  You might even want to use a dif­fer­ent bank.  Unless you are extreme­ly dis­ci­plined, you’ll be tempt­ed to spend those extra funds if you keep them in your check­ing account.  Remem­ber, if you put off an expense until next week, it is prob­a­bly not an emergency. 

 

Read Part 1 —  Hav­ing the “Seri­ous” Talk

Read Part 3 — Are You Going Back to Work?

Read Part 4 — Finan­cial Plan­ning for Adop­tive Parents

Read Part 5 — Becom­ing a Step-Parent