If you are expecting your first child, you’re undoubtedly experiencing a wide range of emotions: excitement, anticipation, nervousness and maybe even a little fear. Having a child is a monumental event that will impact virtually every area of your life, including your finances.
There are so many things to think about in anticipation of the new baby's arrival that planning financially for having a child often ends up taking a back seat. In fact, some new parents don't give much thought to how a baby will impact their finances until the day they bring their bundle of joy home from the hospital. This can be a costly mistake, as the expenses incurred in raising a child will usually have an immediate, and perhaps drastic, impact on the family budget.
In the short term, of course, there will be lots of diapers and baby formula to buy, not to mention such baby essentials as a crib and bedding, changing table, stroller, car seat, high chair, safety gates, and clothes — lots of clothes!
In the longer term, it's now estimated that the average cost to raise a child from birth until age 18 will be about $241,000 (in 2014 dollars), up three percent from the prior year, according to the U.S. Department of Agriculture. This figure includes housing, food, transportation, clothing, healthcare, education, childcare and miscellaneous expenses like toys and electronic gadgets. However, that nearly-a-quarter-of-a-million-dollar figure does not include sending a child to college.
Start Planning Early
The best way to prepare financially for having a baby is to start planning for how the child is going to affect the family budget long before your baby is born. Ideally, this planning will start before you even decide to have a child. If you're already expecting, don't waste any more time in determining what the baby's financial impact on your family is going to be — and how you will adjust your finances to deal with it.
The first step is to analyze your current expenses. If you don't manage your family finances based on a budget, now would be a good time to begin. Start with your expenses, both essential (like your mortgage or rent, utilities, transportation, insurance and groceries) and non-essential (basically everything else, including entertainment and eating out). Next, subtract your expenses from your total monthly income to see whether you are spending more or less than you make.
Now write down all of the additional expenses you can think of that will result from having a baby. We're not talking about one-time purchases like baby room furniture, a stroller and a high chair, but rather ongoing expenses that you’ll incur every month. These will typically include:
- Diapers for two to three years
- Baby formula for the first few months, followed by baby food and then eventually solid food
- Baby, toddler and children's clothes and shoes
- Health insurance
- Childcare if both spouses work
- Toys and entertainment
Make an educated guess as to how much money these expenses will add to your monthly budget and then add this amount to your current expenses. If your new expense total exceeds your income, you’ll need to look for some expenses you can cut. Start with entertainment, since having a new baby at home is probably going to significantly reduce your entertainment opportunities anyway.
If both you and your spouse work and one of you plans to stay home with the new baby beyond the typical twelve weeks of maternity leave, this could have a drastic effect on the income side of your budget. Planning for such a dramatic loss of income should start long before your baby is born — or for that matter, even conceived. Along the same lines, if you are living in a one-bedroom apartment or similarly cramped quarters, you will want to think ahead about how a housing change to accommodate the child – whether to a larger rental or a home purchase – will affect your expenses.
Beyond the Budget
Adjusting your family budget to accommodate the additional ongoing expenses that will result from bringing home a baby is just the first step in planning for the financial impact of having a child. You might also want to reassess your needs for life and disability insurance and/or your coverage amounts.
The purpose of life and disability insurance is to provide income to your family should you or your spouse unexpectedly die or become disabled. With the arrival of a new baby, you should consider buying one or both of these types of policies, or increasing your coverage amounts if you already own these policies.
And while college might seem like a long way off, it’s never too early to start saving for your child’s future college education – or at least thinking about it. So you might want to look into the various options that are available to help you save for college, such as Section 529 education savings plans, Coverdell Education Savings Accounts (ESAs) and custodial accounts.
Having a baby will likely be one of the most joyous and memorable events of your life. By getting an early start in planning for how a child will impact your family’s finances, you will have one less thing to be stressed about when you welcome your new baby into the world.
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