Becoming a parent often means major adjustments in many aspects of your life. In addition to navigating how to care for your child, you're also going to need to be prepared to handle the costs associated with raising a child. Although preparing for a baby is an exciting time, it is important to consider how it will affect you financially. From setting up a nursery and buying diapers, to opening a savings account or a college fund, here are some considerations and expenses to work into your budget:
Steps to Take with Your Finances before Your Baby is Born
According to a study by Michigan Medicine, the average out-of-pocket expense for a vaginal birth was $4,314 in 2015, while the average out-of-pocket cost for a C-section birth was $5,161 – and that’s with insurance! Total pregnancy and childbirth-related expenses can be dramatically higher for women who require infertility treatments, or who have complications before or during delivery. For those adopting, the financial hit can be even greater, with U.S. adoption costs typically reaching $50,000 or more.
The costs don’t end once you bring your baby home. Adding a child to your health insurance plan means your premium will likely increase. Newborns typically must be added to a health insurance plan within 30 days of their birth. Once they’re added, any check-ups and vaccinations they had before that time will generally be covered retroactively.
Another thing to consider is if you, your partner, or both of you will take maternity or paternity leave. In many cases, you will not be paid your full salary while on parental leave. The federal Family Medical Leave Act (FMLA) requires most U.S. employers to allow 12 weeks of unpaid leave for qualified employees. Depending on which state you work in, you may be covered by other parental leave laws as well. Individual policies can also vary by employer. Some companies may pay you a percentage of your salary for a certain amount of time, or they may require you to use sick and vacation days while you are out. It is important to know your company’s policy ahead of time so you can adequately budget for your time off.
If you do not already have one, starting an emergency fund while preparing for the arrival of a child can be a good idea. Having money saved up can help you cover any unexpected costs that may come up during the pregnancy, adoption, delivery, or the first few months of the baby’s life.
Expenses You May Not Have Considered
While you may feel that you have a good handle on the basic expenses associated with a child, such as food, clothing, and health care, there are some additional costs that many people don't think of. Here’s a look at some child-related expenses you may not have considered:
• Child care expenses. Most people expect to pay for daycare starting at a certain age, but it may be more complicated than a monthly cost. If you're comparing the cost of outside child care against having you or your partner stop working for a period of time, you’ll also need to consider the potential impact on their future earning power once they do return to work (if they’re planning to).
• Housing. Depending on your current living situation, you may or may not need to consider moving. Even if your existing home is sufficient for a new baby, you may want to think about whether that will still be the case if you have additional children in the next few years. If you are planning to move before the baby is born, should you rent or buy? If you are thinking about purchasing a home, you’ll not only need to ensure you can afford your monthly mortgage payment, but you will need to plan for a down payment and closing costs as well.
• Life insurance and a will. When you become a parent, your child’s needs become front and center. Many parents want to know that their child will be provided for if something should happen to themselves or their partner. Life insurance is one way for young parents to ensure financial stability for the family if one spouse passes away. A life insurance payout can help the surviving parent with expenses such as funeral costs, mortgage payments, and childcare and education costs. A will is an additional safeguard new parents can put in place to ensure their child is properly provided and cared for after they pass away.
• Entertainment. It may not seem like a newborn needs much in the way of entertainment, however as your child gets older you will likely want to ensure they have things to keep them busy and occupied, whether they be toys, games, books, or other educational resources. In such a technologically-driven world, many parents will want to consider purchasing tablets or computers for their children down the road to help assist with their schooling and learning.
• Extracurricular activities. As your child gets older, you may want them to participate in extracurricular activities such as youth sports, dance classes, music lessons, and more. In some cases, these can start as young as age 3 or 4. In a 2019 study, 46% of parents surveyed said they spent more than $1,000 per year on their child’s activities. The cost of these activities can add up, and often increase over the years as the child becomes more involved in their activity of choice. Factoring these types of costs into your budget can prevent you from having to pull your children out of an extracurricular activity should your family have a financial emergency down the road.
• Education. With college costs skyrocketing, it’s no wonder that many parents want to get a head start on planning for their child’s educational future. By starting a savings account for your child, or investing in a CESA or 529 plan, you can help to ensure that you’ll have the funds necessary when your child is ready to attend a private school, or college down the road. If you’re considering an investment account to help save for future education expenses, it’s always a good idea to first consult with a financial professional or tax expert to ensure you’re making the right choices for your unique financial situation.
Planning financially for a child ahead of time, especially your first, can allow you to focus on the joys of parenthood, rather than worrying about how your finances are being affected. Staying ahead of child-related expenses and properly budgeting for them can help put you, and your new family, in a better place financially.