Babies are a cause for celebration. But a new child also requires some careful financial planning by the parents.Indeed, that little bundle of joy comes with some pretty big financial expenses.
The average cost of raising a child born in 2015 to age 18 for a middle-income family in the U.S. is roughly $233,610, or $284,570 when adjusted for inflation, according to the most recent data available from the U.S. Department of Agriculture. That figure does not include the cost of a college education.1 With inflation, that number translates to roughly $299,000 in 2022.
To provide for your growing family, you must take steps to get your financial house in order. The financial checklist for new parents includes:
- Reworking your budget.
- Estimating childcare costs.
- Adding your baby to your health insurance.
- Considering life insurance.
- Getting your estate planning documents in order.
- Prioritizing your retirement savings.
Rework your budget
For starters, you’ll need to budget for basic needs. (Related: How to create a family budget)
According to Babycenter.com's calculator, you can expect to spend roughly $15,775 during your baby’s first year. That includes the cost of childcare, diapers, food, healthcare, college savings, and gear such as strollers and cribs.
And, if you plan to continue date night with your spouse (highly advised for parents), you should factor in babysitting expenses, which average roughly $20 per hour for one child, and $23 for two children, according to Parents magazine.
Estimate childcare costs
Perhaps the biggest potential cost of raising babies and kids, however, is childcare — especially if both parents plan to continue working full-time.
Costs vary dramatically based on geography and whether you opt for a lower cost day care center, or live-in nanny.
Overall, the average child care cost for one child in 2021 was $694 per week for a nanny, $226 per week for a child care or day care center, and $221 per week for a family care center (up from $177 per week.2
You’ll eliminate that expense if one of you quits your job to stay home with the baby, of course, but you’ll lose a second income. There is also the financial impact of forgone promotions to consider, which may impact your future salary if you return to work in a few years, plus the opportunity cost of temporarily sidelining your retirement contributions.
As you do the math to determine what works for your family, keep in mind that plans are subject to change. Many new parents who expected to stay home with the baby decide they’d be happiest returning to work — and vice versa. Financial planning gives you the tools to stay flexible.
Once the baby arrives, you will also need to add him or her to your family’s health insurance policy promptly.
Many plans require new parents to do so within 30 days or risk the loss of certain benefits until the next open enrollment period. Contact your insurance provider to find out what their terms are and get any enrollment forms you may need.
The average annual family premium for employer-sponsored health insurance in 2022 was $22,463 with workers on average contributing $6,106, according to the KFF Employer Health Benefits Survey.3
If you and your spouse are offered health insurance coverage through your employers, crunch the numbers to determine which offers the better benefits.
You’ve got a dependent now. Life insurance is a must for many new parents, said Paul Bennett, a financial planner in Great Falls, Va., in an interview.
Such coverage helps ensure that your spouse and children will be able to maintain their standard of living should you die.
How much coverage and what kind of policy you need depends on your family’s monthly expenses, net worth, and income. Some financial planners, however, suggest seven to 10 times your annual income as an appropriate starting point. (Life Insurance Calculator)
Life insurance comes in three basic varieties: term, whole life, and universal.
Term life policies provide coverage for a limited number of years -- often 15, 20 or 30. If you outlive the term, the policy’s coverage expires and no benefits are paid out. Most term policies allow for continuation after the initial term, although usually at a higher premium. Term insurance is generally more affordable than whole life or universal coverage.
Whole life insurance is designed to guarantee for your lifetime a specified benefit payable to your spouse or other beneficiaries upon your death. It also accumulates cash value over time and offers the opportunity to earn dividends.
Universal life insurance is a hybrid, of sorts, allowing the purchaser to set her own premium (beyond a required minimum) and death benefit. In essence, it is a permanent insurance policy that combines insurance with an account that earns a tax-deferred rate of return declared by the insurance company.
There’s no one insurance policy or coverage amount that’s right for everyone. Some people prefer to consult a financial professional to sort through the options. Whichever policy you choose, however, it’s important to choose a company in good financial standing. (Related: What kind of life insurance should a new parent get?)
You can check an insurance company’s financial health by looking at its rating from credit rating agencies like Moody’s, which gives top tier companies an “Aaa”, and A.M. Best, which gives its highest ranked companies an “A++”.(Check here for MassMutual’s financial ratings ).
Beneficiary forms and wills
After any life event, including a marriage, divorce, or birth of a child, you should update the beneficiary forms for your life insurance policy, annuities, and retirement accounts, such as your IRA or 401(k).
Such forms, which typically trump your will if a discrepancy in beneficiaries exists, help ensure those assets will eventually pass to your heirs outside of probate. Probate is the lengthy and costly legal process by which the courts settle your estate after your death. (Learn more: Estate planning tools for households)
If you haven’t done so already, both parents should also work with an attorney to create a will, a living will, and powers of attorney, especially if you have children from a previous marriage, says Bennett.
Don’t shortchange yourself
It’s natural to want to give your child every advantage, including a college degree, but just be sure any savings you sock away for your child’s education do not come at the expense of your own financial well-being — a classic parent mistake. (Learn more: 6 ways to cut college costs in half)
Once you’ve paid your monthly bills and contributed a significant portion of your salary towards retirement, you can consider using one of the savings tools available to give your progeny a head start.
The 529 education savings plan, for example, enables parents to invest after-tax dollars in mutual funds or similar investments and any earnings are tax free if used to pay for college costs. Earnings not used for qualified expenses will be subject to federal and state taxes, plus a 10 percent penalty. Note that if your child receives a scholarship, you may make a non-qualified withdrawal for the exact amount of that scholarship from your 529 plan penalty-free, but you would still owe taxes on the earnings.
Parents who think their child may decide not to pursue a degree may be best suited saving in a Roth IRA, from which money can also be withdrawn penalty-free to pay for college costs.
Both tools have financial aid implications, however, and parents are advised to consider their options with care. Again, some parents opt to speak to a financial professional about options. (Related: College tuition: Big changes for the FAFSA)
There’s nothing like a newborn to melt your heart, or drain your wallet. By planning ahead, however, expectant parents can rest assured that their budget will be balanced and their loved ones provided for — even if they aren’t getting any actual sleep.
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This article was originally published in December 2016. It has been updated.