Starting a family is a major life decision and one that doesn’t come cheap. On average, it costs anywhere from $5,000 to $11,000 to have a baby. And parents spend just over $233,000 on average to raise a single child from birth to adulthood, according to the USDA. That figure doesn’t include the cost of college. Planning for a baby financially means taking a look at things like your budget, savings, debt and health insurance coverage to understand what you can afford. If you’re ready to tackle the challenges of parenting, these tips can help with getting your finances in shape. A financial advisor can help you make sure you’re planning covers all the proverbial bases.
Start With Pregnancy-Related Expenses
Creating a baby budget is less overwhelming when you break it down into different sections. The first set of numbers to consider when planning for a baby financially are related to the costs of being pregnant. For example, some of the things to factor in here may include:
- Copays for prenatal doctor visits
- Prenatal vitamins
- Expenses related to specialty care if you’re likely to have a high-risk pregnancy
- Maternity clothing
Healthcare-related costs may be covered by your insurance or your spouse’s if you’re married. It’s important to review your coverage to understand how much you may be responsible for paying out of pocket.
Setting up a savings account for these expenses can be helpful. You can allocate part of your paychecks each payday so you have money on hand to cover copays or larger prenatal care medical bills as they arrive.
Estimate the Cost of Giving Birth
Once you’ve calculated pregnancy expenses, you can focus next on the cost of delivering a child. What you’ll pay can depend on several things, including:
- Where the birth will occur (i.e. in a hospital, at home, at a birthing center, etc.)
- Whether a doula or midwife will be employed
- Whether a C-section is preferable or necessary
- Potential for any complications that might require a longer hospital stay
You may be able to deduct some medical expenses on your taxes. Again, it’s important to review your health insurance carefully so you understand what will or won’t be covered. If you started a prenatal savings account, you may consider bumping up your contributions if you expect to have to pay more out of pocket for labor and delivery later.
Plan Your Post-Birth Budget
When planning for a baby financially, it’s important to consider that your spending and income may change once your new addition arrives. First, look at the spending side of things.
Some of the new categories added to your budget can include:
- Baby gear (such as a crib, car seat, stroller, etc.)
- Baby clothing
- Diapers
- Formula and bottles, if necessary
- Basic hygiene items, such as baby lotion, shampoo, diaper rash cream, etc.
Your new baby will need to have regular checkups so you may need to factor in copays for those visits as well. And remember that once your baby is born, you’ll need to contact your health insurance provider to have them added to your policy.
Another big expense may be childcare if you plan to return to work at some point. Going back to work can help boost your household income but it’s important to consider how much of that will go towards childcare. It’s possible that spending money on daycare, babysitters or a nanny, along with the costs of commuting, may eat up a sizable chunk of your paychecks.
If your employer offers maternity leave or paternity leave, be sure to ask if paid leave is available, as not all companies offer this. Paid leave can supplement your income temporarily and give you time to decide if returning to the workplace makes sense financially.
Increase (or Start) Your Emergency Savings Fund
If you haven’t started an emergency fund yet, that’s something to add to your to-do list when planning for a baby financially. Your emergency savings can help you get over minor speed bumps, like a small car repair, or bigger obstacles such as a medical crisis that requires you or your child to be hospitalized. A high-yield savings account can be a good choice for holding emergency savings. You can establish one of these accounts at an online bank and link it to your checking account for easy transfers.
When deciding how much to keep in emergency savings, there are different ways to approach it. If you’re just starting off, for example, you might want to aim for at least $1,000 for each member of your family. So if that includes you, your spouse and a new baby, you should have $3,000 in emergency savings right off the bat.
From there, you can work on saving three, six or even 12 months’ worth of expenses. Having a larger emergency fund can make it easier to get through an extended financial hardship should one come along.
Review Your Life Insurance Coverage
Life insurance is something most people need, especially when there’s soon to be a child in the picture. If you have life insurance, consider whether your policy offers a large enough death benefit to meet your family’s needs if something were to happen to you. Ideally, both parents should have some type of life insurance in place if you’re married or partnered up.
Term life insurance can be a good bargain since premiums tend to be lower if you purchase a policy when you’re young and healthy. You may consider a permanent policy as well if you want lifetime coverage but it can be more expensive to own.
You may also consider purchasing life insurance for your child once he or she is born. This may seem morbid but life insurance for children can be used as an investment tool. Cash value policies accumulate cash value while providing a death benefit. If your child remains healthy, they could use the cash value to buy a car or help pay for college down the line.
Check Your Retirement Savings and College Savings Plans
Having a baby means saving for retirement can get sidelined if you’re having to reconfigure your budget to account for new expenses. But you can’t afford to let it slide all the way to the backburner.
Instead, look at what you’re saving for retirement currently. That includes money you’re contributing to a 401(k) out of your paychecks as well as any money you’re saving in an IRA. Calculate the percentage of your income you’re saving toward retirement now. Then, look at how your spending and income may change once the baby arrives to see if you can commit to saving that same amount.
If you can’t, then take another look at your budget to see where you may be able to trim expenses. Or consider ways you may be able to increase your income by negotiating a pay raise or starting a side hustle. At a minimum, it’s important to contribute at least enough to your 401(k) to get the company match if your employer offers one. Otherwise, you’re leaving free money on the table.
Once you get your retirement strategy down, then you can think about saving for college. Remember, you can borrow money to pay for your child’s education but you can’t borrow to fund your retirement. So if you have to prioritize one over the other, focus on retirement first.
But if you have money to save for college, you may open a 529 college savings account or Coverdell Education Savings Account. Both can offer tax advantages, though 529 plans have fewer restrictions when it comes to how you can use the money. You can also explore savings bonds as another option to pay for college.
Draft or Update Your Will
A last will and testament allows you to specify how you want your assets to be distributed after you pass away. You can also use a will to name legal guardians for minor children. If you’re soon to be a parent or recently welcome a new child, it’s a good time to update your will or write one if you don’t have one yet. An estate planning attorney can help with this but you can also use inexpensive online will-making software programs to draft a simple will.
If you have more extensive assets, you may also consider creating a trust to go along with your will. Trusts allow you to transfer assets to a trustee, who manages them on behalf of the trust’s beneficiaries. A trust can be a useful tool for estate and tax planning.
Another savings account option you might consider when having a baby is a custodial account. Custodial accounts allow you to set aside money on behalf of a child. The money in the account becomes theirs once they reach adulthood. But custodial accounts can have tax consequences for both you and your child so you may want to speak to a tax professional before opening one.
Bottom Line
Planning for a baby financially ideally begins before a pregnancy happens, but it’s never too late to get started. Checking your current budget and income against what you think you’ll spend or earn after the baby arrives is a good place to start. But it’s also important to take a long-term view to make sure you’ve covered all the financial bases. And don’t forget the importance of looking for ways to save money.
Tips for Investing
- Consider talking to a financial advisor to get help when planning for a baby financially. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Along with gauging the cost of a baby make sure to factor in the cost of owning a home if those are in your plans. A mortgage calculator can give you a quick estimate of how much you can afford.
Photo credit: ©iStock.com/digitalskillet, ©iStock.com/monkeybusinessimages, ©iStock.com/monkeybusinessimages