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.
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.
However, 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.