Becoming a parent will totally change your life in so many ways. If there wasn’t enough enough for brand new parents to worry about, the financial decisions alone can be daunting. Making the transition from a couple to a family can have lasting repercussions on your budgets. Taking the time to put your financial ducks in a row will help make things easier. It will also make Junior’s future a bright one.
Whether you’re currently expecting your first bundle of joy or you already have several children, make sure you take the time to focus on these financial decisions. It could be life changing for your kids, so it’s important that you don’t brush these off.
Make a Will
I was shocked to discover that children of parents who die intestate (without a will) have the state decide who will take care of them. Yes, even if the family has already discussed (and informally agreed) who will be the guardian. The government can overrule the wishes of the deceased parents. So make sure you put those wishes down in writing. A will is absolutely necessary if you have children. While disturbing your assets is one thing, you need to have a rock solid plan for who will take care of your children if you pass.
Here’s a personal example. My parents live overseas. Without a will or trust, they would not be allowed to take my kids home with them without proper documentation. In addition, having a will in place means you can designate an executor to your estate. That person will handle the money while your child is still a minor. These are decisions you want to make ahead of time. Talk to your friends and family about it. Then figure out who will make the best choices on your child’s behalf if something happens to you.
Otherwise, your child may be put into government sanctioned foster care while the court takes its time sorting things out. While your children will likely eventually end up in the care of a relative, the whole process is stressful and expensive. A portion of your estate could be gobbled up my legal fees as the lawyers sort through the details. Don’t let that happen.
Get Life Insurance
Many people have some sort of life insurance policy through their employer. However, it’s often a very basic plan. It likely isn’t nearly enough coverage for your family, should you die unexpectedly. Not many people think about what-ifs, but most families these days rely on both parents’ incomes to maintain their lifestyle. How would your family’s life change if one income suddenly vanished? A good rule of thumb is to have enough insurance to cover about five times your yearly salary.
That doesn’t mean that stay-at-home parents should forego life insurance either. A 2018 study by Salary.com concluded that a stay-at-home parent would earn roughly $162,500 per year if they were fairly compensated. Losing a stay-at-home parent without life insurance will still put a financial burden on a family. After all, the family would now need to hire someone to perform many of those duties. Bottom line? Make certain that both parents are adequately covered for life insurance. While five years of salary is a good place to start, you ideally want enough coverage to get your children well into adulthood if something happens to their parents.
Start (or Increase) Your Emergency Fund
We all know that we need three-to-six months worth of expenses stashed away in case of emergency. However, it can be easy to neglect funding that account when you’re a dual-income-no-kids household. After all, there aren’t that many unexpected expenses when you have no kids. Plus a major accident requiring money just never seems very likely likely.
However, all that changes when a couple becomes a family. Formula, diapers, and baby gear all cost a pretty penny. You aren’t sleeping as much, so you may get sick more often. That requires more visits to the doctor. Even if everybody is healthy, you are going to be seeing the doctor frequently anyway since your baby is going to require all these routine checkups.
You have to save some for an emergency. Whether it’s a surprise job loss, sudden medical emergency, or, you know, a global pandemic like the one we’re all currently facing. Set up automatic payments to your savings account and you likely won’t even miss the money from your paycheck.
Focus On Yourselves
You will find this advice on almost every list of money tips. However, it bears repeating over and over. Fund your retirement before you worry about saving for Junior’s education. There is no way to take out a loan for retirement. On the other hand, your child can certainly to go to school on loans, grants, and scholarships. If you’re in a position where you can comfortably save for your retirement and start a college fund, that’s great. But if you have to choose one or the other, put yourself first in this case. I’m sure your children would rather pay off student loans than have to fully support you in your golden years.
Keep Spending in Check
It can be easy to get carried away in wanting only the best for your child. While it’s certainly nice to splurge on some things for your bundle of joy, don’t get carried away. Ultimately, your child doesn’t know (or care) whether they’re sleeping on brand name designer crib sheets or department store hand-me-downs. In fact, hand-me-downs are usually more worn and the fabric may be more comfortable.
Then there’s the toys. Please don’t overspend on toys. Young kids have just as much fun playing, whether they are playing with toys that costs hundreds of dollars or simply playing with the Amazon shipping boxes. They will get bored of them just as fast, no matter how much the toys cost.
It’s not until they grow older that children start convincing themselves that the more expensive are somehow better. When your kiddos are small, though, you should refrain from buying too much stuff for them.
Start a College Fund
College is expensive and only getting more expensive with each passing year. For the current 2020-21 academic year, the average tuition and fees at an in-state college offering four-year degree programs totalled $10,560. At four-year private institutions, the annual cost averages $37,650, according to College Board, which tracks trends in college pricing.
The typical American student leaves college today owing nearly $40,000 in student loans. Collectively, Americans currently have $1.7 trillion in student loan debt. The bottom line is that higher education isn’t cheap. Parents should therefore start a college fund and begin saving money in it as soon as a child is born. Look to open a 529 Plan, which is a tax-advantaged savings plan designed to encourage saving for future education costs.
Get Health Insurance
If you already have health insurance, be sure to add your child to your existing coverage. If you (or your spouse) don’t have health insurance through an employer, you should look into getting private insurance. You’ll want sometime to cover medical bills, as well as dental or prescription drug costs.
Children visit the doctor a lot in their first few years of life, even if it’s only for routine check-ups. However, the costs associated with doctor visits and prescription drugs to treat common infections and ailments can add-up fast. Finding an affordable health insurance policy to cover the entire family is advisable. Most large health insurers, such as BlueCross, United Healthcare and Aetna, offer information on their available policies online.
Pay Down Debt
In addition to taking all the steps listed in this article, new parents should also take steps to control and pay down their existing debt. Over the long-term, debt can crush a family. It makes it difficult to qualify for car loans or a mortgage. Also, costs to service debt by paying the minimum amount owing each month can erode a family’s budget.
As a rule, parents should keep one credit card for emergencies only. Pay off the entire amount owing on the credit card every month and try to keep the balance at zero. If you keep in mind that credit cards charge 21% to 28% interest on any outstanding balances, it will help motivate you to keep the card paid off. Try to pay off any student loans as quickly as possible. Then try not to take on any debt that isn’t absolutely necessary. Remember that good debt is for things that appreciates in value (like a house) and allows you to build equity. Bad debt is most other things.
Budget for Childcare
Another big expense for parents is childcare. If both parents work full-time, chances are you will not be able to avoid sending your kid to a childcare provider or a daycare center. These services are not cheap. According to the Center for American Progress, it costs an average of $1,230 per child, per month. That’s nearly $15,000 a year to provide childcare to an infant.
Paying for childcare will likely require some careful budgeting on the part of you and your spouse — especially if you have several young children who require care. It helps if you have family who live nearby and who are willing to pitch in. However, this is a luxury that not everyone has available to them.
Learn Applicable Tax Benefits and Deductions
Now for some good news. There are tax advantages to being a parent. In the U.S., parents with young children are eligible for a child tax credit. Designed to help taxpayers support their families, this credit has been greatly expanded during the global pandemic. The child tax credit decreases taxpayers’ tax liability on a dollar-for-dollar basis.
The legislation allows for a maximum annual tax credit of $3,000 per child under the age of 18 or $3,600 for children younger than age six. As of 2021, the child tax credit is fully refundable. In addition, the 2021 child tax credit will be distributed to eligible taxpayers in advance payments, possibly on a monthly basis, as of July 2021. There are also several tax deductions available to parents. Learning about the tax benefits and deductions that apply to you as a parent will help when you file your taxes each year and could put some much needed money back in your pocket.
Make Extra Money on the Side
Managing all the items on this list and covering the expenses that come with children is not easy. After all, a dollar can only be stretched so far. To help cover the costs that come with children, you may want to consider making extra money on the side. Known as a “side hustle,” this is when you earn extra money at night and on weekends, in addition to your regular job.
The good news is that it’s never been easier to find extra work. People today often have multiple jobs and make extra money driving for companies such as Uber, delivering food, freelance writing, and reselling items on websites like eBay. There is no shortage of ways to make extra money. You will likely only be limited by your imagination. But the extra cash could really help with a new baby.
Teach Good Financial Habits
Every parent has an obligation to teach their children and pass wisdom from one generation to the next. And one of the most important things any parent can teach their child is good financial habits. Take everything you have learned about personal finance and share it with your child (at the appropriate age, of course). Also, be sure to get them a bank account early and show them how to use it responsibly. Remember that financial education is a lifelong pursuit.
Our financial needs and demands change with our age and stage of life. Taking your child along with you on that journey will prepare them for the future and help them succeed as adults, avoiding many of the financial pitfalls that hold people back and lessen their quality of life. Remember to pay it forward.
The Bottom Line
It’s been estimated that it costs nearly a quarter-million dollars to raise a child to age 18. That’s not even including college costs. Don’t add to the financial stress of parenthood by overspending on your kids. This will help your overall household budget. Plus it will also help teach your children the value of thrift and frugality. The lessons will serve them well throughout their lives. Many kids who have less when they are young learn to be more creative, since they have to figure out how to have fun themselves. Don’t you want that for your kids?
Lastly, don’t be shy about talking about money with your children. Obviously, this advice doesn’t apply to newborns. However, by the time your children are three or four, you can have age appropriate money discussions with them. Explain how you make your money, and talk to them about where it goes (rent, food, etc). Don’t be ashamed to tell them that a new iPad or gaming console is simply not in the budget. They will quickly understand that money is not a finite resource.