Starting a Family? Be Financially Prepared by Asking Yourself These 3 Questions
The cost of raising a child born today to age 18 averages about $245,000. And that doesn’t include college. By preparing early, you’ll be setting your new family up for a lifetime of financial security, from your child’s first breath to his or her college graduation and every other milestone that follows.
What can you do to prepare for the cost of a new baby? Start by asking yourself these three questions:
1. How exactly will my income and expenses change?
Your first major expense is likely the cost of having the baby. Even if you have health insurance to cover the majority of the hospital bill, a 2013 study found the average out-of-pocket share was $2,200 for vaginal deliveries and $2,700 for C-sections. Beyond that, count on adding about $15,500 to your annual expenses for the first year with baby. That’ll cover day care, diapers, formula, clothes and medical costs.
Your income will probably change, too. In the very short term, Mom may be taking maternity leave. And even if she’s covered by workplace short-term disability insurance, that’ll pay less less than her full salary during that time. Longer term, will she or Dad be cutting back on hours or become a stay-at-home parent?
For your situation, the best way to get a handle on the financial impact of bringing home baby (and how you may need to adjust your saving and spending) is to know where you stand today. So if you don’t already have a budget, create one. Only then can you can realistically look for ways to cover your new expenses. Download a budget worksheet.
2. Do I have plans in place to cover the unexpected?
Even if you’d carefully planned for the cost of a new baby, what happens when the water heater goes out? Or the cat needs surgery? Now more than ever, you need to know you can cover unexpected expenses without having to rack up credit card debt or cut back on saving for your new family’s future. So establish an emergency fund. Start small if you need to, but commit to building your emergency fund with up to six months of living expenses. Then remember to add to the balance as your income and expenses grow.
Now that someone else will be depending on you, you’ll also want to make sure they’re protected in case something unexpected happens to you. Make sure you have enough disability income insurance. If you become ill or injured and unable to work, disability income insurance will replace a portion of your income. And if you haven’t already considered buying life insurance, now’s the time to do so. With a little one on the way, you want to make sure he or she will be taken care if you die unexpectedly.
Be sure to get legal documents in place, too, that establish guardianship for your child. If something happens to you, whom would you want to take care of your child? If you don’t have things like a will or trust (which includes the naming of a legal guardian for minor children) and powers of attorney established, your family details will end up in court with a judge deciding what he or she thinks is best.
3. Which should I save for first—college or retirement?
All parents want the best for their children, and for many that means funding their son or daughter’s college education. If that’s one of your long-term goals and you can put aside a little money each month in a college fund, great. But if you’re struggling to save for college and fund your own retirement at the same time, focus on saving for retirement first. Why? Because children have options for funding their education, such as loans and scholarships; retirees don’t have those options.
And as you save for retirement, the sooner you can start, the better. Go after low-hanging fruit first. If your employer offers a 401(k) or Roth 401(k), take advantage of the opportunity to save for retirement, and contribute at least enough to earn the company match if there is one. It’s free money. As you begin to save more, aim to save at least 20 percent of your household’s gross income for your short- and long-term goals.
By taking the time to ask (and answer) these three questions, you’ll be taking the first steps toward creating a secure financial future for you and your growing family.