Bringing a child into the world is one of life’s biggest blessings. Congratulations, to you and your growing family! However, alongside the joy of parenthood comes a slew of financial responsibilities that can feel overwhelming.
When planning for the financial aspects of parenthood, it’s wise to be proactive. Besides medical costs related to the pregnancy and delivery and equipping the nursery, there are also increased insurance needs, building an emergency fund, budgeting for expenses in the first few years, putting together and executing an estate plan, and starting a college fund while saving for retirement.
Here, we provide an overview of spending priorities and financial tasks to tackle before your baby arrives.
Related: 5 Reasons Why New Parents May Need a Financial Advisor
Health Insurance
Before having a child, a couple should review their health insurance policy to find out about deductibles, co-pays, and policy limits. Once you’ve decided on an OBGYN and a hospital, you should call your insurance company to find out what is covered and what the final bill is likely to be. Hospitals can also provide this information.
Potential costs on the final bill for labor and delivery can include expenses such as deductibles for mother and baby, out-of-pocket hospitalization costs, and co-pays for doctor’s visits and lab tests such as ultrasounds and amniocenteses.
Hospital costs for childbirth average $18,865 in the United States, according to the Peterson-Kaiser Family Foundation (KFF) Health System Tracker. But health insurance can cover most of that cost:
Life and Disability Insurance
With a baby in the picture, the health and ability to work of each parent is even more critical to family finances. Consider everyone’s contribution to the household, as well as what would happen if an accident or illness rendered one of the parents disabled or unable to work.
Check your employers’ policies to see what coverage is available there. Discuss your benefit options with your financial advisor to see if there is a need for additional disability, above and beyond any employer disability insurance.
Related: What to Consider When Purchasing Disability Insurance
In terms of life insurance, each wage earner should have life insurance equal to six or seven times their annual income. A stay-at-home parent should have insurance to cover the cost of hiring someone for childcare, cleaning, and more, so the surviving parent can work.
Related: Life Insurance Guide for New Parents
Building an Emergency Fund
Having an emergency fund that covered three to six months of living expenses is essential for financial security. This safety net can protect your family against unforeseen events like job loss or medical emergencies, which can be even more challenging with a new baby.
Budgeting for First-Year Expenses
The first year of your child’s life can be particularly costly. According to a 2015 US Department of Agriculture report (the latest data available), the average middle-income family spends between $12,000 and $14,000 on child-related expenses each year. For newborns, the cost is higher. Some studies show numbers ranging from $20,000 to $50,000 for the child’s first year of life, depending on location and household income. That excludes child care expenses, which can further inflate your budget.
Understanding the Long-Term Costs of Raising a Child to Age 18
Aside from housing, food, childcare and education, there are other costs associated with raising children that are important to budget for. Some of the most common costs include:
- Transportation
- Clothing
- Extracurricular activities
- Sports and hobbies
- School fees for field trips, activities, fundraisers, etc.
- Family trips or vacations
Some of these items are considered necessary, while others are wants. How much you spend on these things (if you do at all) can depend on the number of kids you have and what your budget allows.
The same USDA report reveals what it costs a middle-income family to raise a child through the age of 17. In 2015, it projected a cost of $284,570. If you factor in an inflation rate of 4%, that’s an average of $310,605 today.
The Work vs. Stay-at-Home Decision
A big issue for many expectant parents is whether both should work, or one should stay home with the baby. Clearly, this goes beyond financial considerations. It’s a big decision with important implications for the young family’s future.
Your financial advisor can crunch the numbers to see how much it would cost for the second parent to work. But you might be surprised that once you factor in child care, transportation, taxes and – for exhausted working parents – a cleaning lady and meals out, how little income is left. One parent at home might just pay off.
On the other hand, making that choice could compromise the future prospects of the at-home parent, making it more difficult to secure employment commensurate with skills and education at a later date, so consider all the trade-offs.
College Planning
According to US News, the average cost to attend a four-year private college during 2022 was $55,570 (tuition, fees, room, and board). Even if your child chooses an in-state public school, the average cost was around $27,940 (tuition, fees, room, and board).
Of course, your new child won’t be entering college for another 18 years, and few can forecast what college will cost so far out. There are a number of different ways to save for college, and your financial advisor can help you explore the options and set a budget that can help the family – including grandparents – prepare for the expense.
Estate Planning Essentials
At a minimum, consult with an estate-planning attorney to create a will to name a guardian for the child. If extenuating circumstances exist – if the parents aren’t married or there are children from a previous marriage – more elaborate estate planning measures might be necessary.
Retirement Planning: Don’t Neglect Your Future
It’s important that you don’t sacrifice your own financial security… Keep those retirement plan contributions rolling in, even if it means cutting back on college savings. Financial aid is available to college students – not retirees.
Related: How Families Can Balance Paying For College And Saving For Retirement
Financial advisors can offer even more suggestions for new parents when it comes to child preparedness. Given the high costs of raising a child, implementing financial planning strategies now will only help the future of you and your kids.
Elaine Floyd, CFP®️ is Director of Retirement and Life Planning for Horsesmouth, LLC.
Amy Buttell earned an accounting certificate from Mercyhurst University in 2009 and has written financial planning, college savings, and personal finance for many years.
Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.