You’re probably well aware that raising a kid comes with a hefty price tag. But did you know that price tag is a whopping $300,000 for each and every child? And this doesn’t even include college! That’s right, a recent U.S. Department of Agriculture report delivered some sticker shock when it comes to adding up all the expenses involved with being a parent. While housing is by far the largest expense, small items like ice cream cones, ball caps, and toothbrushes really add up over the course of 17 years.
Here are some smart tips to help you be financially prepared for kids.
Make a baby budget: Run the numbers to see how much you’ll spend on everything from food and formula to diapers. A good place to start is by using the USDA’s cost of raising a child calculator, which calculates the annual cost per child based on age. But also consider this…while your costs rise, your expenses may drop as well. This may sound a little strange but think about it: if you’re staying home with baby, you will save money on commuting and work clothes. I hate to tell you this, but you’ll also be dramatically cutting back on how much you spend on going out.
Decide childcare: You will need to decide if both parents will have jobs, or if someone will stay home with the baby. Decide together what’s right for your family, and then do the math to see how the decision will impact your take-home pay. If you are going from a two-income household to a one-income household, start acting like the changes are effective today, which could mean big cuts to your expenses.
Build a cash cushion: We recommend all our clients have an emergency fund of three to six months. It’s even more important for parents, given how unpredictable life with kids can be. Start during pregnancy by saving as much as you can, and cutting debt while you have more certainty in your financial life. You can try methods as simple as putting loose change in a jar, and then transferring the money into an interest-bearing savings account.
Be smart about saving for college: Parents (and grandparents) should consider a 529 College Savings Plan, a tax-advantaged investment vehicle that encourages saving for the future higher education expenses. You can ask family and friends to donate to the fund, instead of buying gifts when the baby is born, or on birthdays. Many of my clients are grandparents in retirement who are looking for ways to leave a legacy and pass their wealth on to the next generation. This is a great way to do that. There are various 529 plans available through different states, state agencies, and educational institutions; each plan has its own rules and there are no state guarantees that the money in the account will grow. There are a lot of options, so we recommend you see a financial professional who will help you determine what will fit your needs.
Lastly, always expect the unexpected! Be flexible! As all parents know, things are going to surprise you from time to time. Being a parent is already emotionally and physically demanding. Having a financial plan in place will help you to focus on what’s important: your kids!