The time has come, the decision has been made. You and your spouse are ready to expand your family. While soon-to-be parents will experience feelings of excitement and anticipation that naturally come with having a baby, they may tend to overlook the financial costs, which can be considerable. From healthcare for mom and baby, to purchasing diapers, paying for daycare, summer camps and sports, to saving for college-the list never seems to end.
A popular saying goes, “Parents are people who carry pictures in their wallets where their money used to be.”
There are no two ways about it, having a baby is a financial commitment and parents need to set realistic expectations for the costs of raising a child. Experts estimate that a new arrival could cost parents around $32,000 for the first two years alone.(1) In addition, the cost of raising a child through age 17 is estimated at nearly a quarter of a million dollars, according to government data.(2)
The recession has had an effect on family planning in the last few years. For the first time since the decade began, Americans are having fewer babies at a rate of 2 percent less than the previous year.(3) The same data reveals 4.2 million births were recorded in 2008, 68,000 fewer than the year before. Despite the decline in birth rates, many couples remain on the path to starting a family despite the current economic downturn.
Financial experts urge individuals who are considering conceiving to get their financial priorities in line early. Working with a financial advisor will help expectant parents reap the benefits of thinking ahead for their expanding family.
Financial planning for baby
First, evaluate where is your money going now-car payments, mortgage, groceries and entertainment? Then consider how you will manage on the reduced income when taking time off for the pregnancy and birth. Once you’ve estimated your current out-of-pocket expenses, then factor in the costs of having a child, including medical bills prior to and after delivery, baby necessities (diapers, strollers, car seats), higher grocery costs and so on. For example:
• Child day care expenses can range from $5,000 per year to more than $20,000 per year for a nanny, depending on where you live.(4)
• The average baby goes through 10 diapers a day. If you choose to use disposable diapers, they can cost you upwards of around $2,000 by the time your baby is potty-trained.(5)
Next, look into your current health coverage, with emphasis on the following:
• The cost of delivering a new baby can range from $5,000 to $8,000 for a vaginal delivery to more than $12,000 for a cesarean delivery.(6)
• Determine which spouse’s health care plan provides the best prenatal care, taking into consideration labor and delivery coverage.
• Find out if adding a dependant, or dependants, adds extra costs to your medical plan.
• Make sure that you qualify for short-term disability insurance, which covers pregnancy, while out on maternity leave. A typical policy will pay 60 to 70 percent of your gross income for approximately six weeks following the birth of your child (there may be a waiting period of a week).(7)
• If disability insurance isn’t an option with your employer, they may be required to provide you time off under the Family Medical Leave Act (FMLA); however, your employer is not required to compensate you.
• After evaluating your insurance coverage, check to see if your employer offers a flexible spending account (FSA). Setting money aside in an FSA account can drastically reduce the cost of out-of-pocket medical expenses by allowing you to pay for qualifying expenses with pretax dollars.
At some point you’ll need to consider how you will put your kid through college. Education planning can never come too early, so start taking a look at 529 College Savings plans. Any family can contribute to a 529 Plan regardless of income, and the federal government won’t tax your withdrawal as long as it’s used for higher education.
A financial advisor can help you select the right 529 Plan, keeping in mind the following:
• Contribution limits may vary by state.
• Tax advantages may vary from state to state and may depend on whether the investor is a resident of the state that sponsors the plan.
• Fees and expenses vary by state and often among various plans offered by the same state.(8)
If you have extra money to save, beyond what you can put in retirement plans, do not put that money in your child’s name, even though you may be tempted to because of some nominal tax benefits. Doing so reduces the chances of getting financial aid (35% of your child’s assets are considered available for college expenses every year, versus 6% of yours).
Finally, take into consideration that your parents could have an IRA or estate plan and may designate some money to go toward their new grandchild in the future. Talk with a financial professional about estate plans and beneficiary designations.
By working with a financial advisor, you can better prepare for the arrival of your most prized investment and avoid any financial surprises that come with adding to your family.
S. Scott Allex, CWS® is a Certified Wealth Strategist® with and offers securities and investment advisory services through First Allied Securities, Inc., Member FINRA/SIPC. He is employed with Long Chilton, LLP in their Harlingen office and can be reached at (956) 423-3765 or firstname.lastname@example.org.