Financing a New Baby: The Cost of Parenthood
Whether you are a parent or a grandparent, your new little bundle of joy will be "dear" in more ways than one. Here's how to plan for the financial to-dos and priorities of new (grand) parenthood.
Births, deaths, marriages, and divorces are significant life events that require financial resources and planning. However, a new baby is perhaps the most joyful of these, as parents and grandparents share their hopes and dreams as the birth comes closer.
When planning for the financial aspects of parenthood, it's wise to be as proactive as possible. Many expenses are associated with having a child, so take some time to consider the long-term implications and create a budget that will allow you to save for your future life.
Besides medical costs related to the pregnancy and delivery and equipping the nursery, there are also increased insurance needs, building an emergency fund, budgeting for expenses in the first few years, putting together and executing an estate plan, and starting a college fund (all while saving for your own retirement).
Here's an overview of some spending priorities and financial tasks to tackle before the baby arrives.
Health Insurance
The first question to ask yourself is: How much will having this baby cost?
Review your current health insurance policy and learn about your deductibles, co-pays, and policy limits.
Once you've decided on a doctor and a hospital, call the insurance company to find out what is covered and what the final bill is likely to be. Hospitals can also provide this information.
Potential costs on the final bill for labor and delivery can include expenses such as deductibles for mother and baby, out-of-pocket hospitalization costs, and co-pays for doctor's visits and lab tests such as ultrasounds and amniocenteses. SmartAsset.com says that hospital costs for a normal birth cost $5,000–$10,000, even with insurance.
In One Year to an Organized Life with Baby: From Pregnancy to Parenthood, Regina Leeds and Meagan Francis offer information and checklists that help parents determine what a policy will cover and what other health and pregnancy-related costs will likely be.
Life and Disability Insurance
With a new baby in the picture, each parent's health is even more critical to family finances. Consider everyone's contribution to the household and what would happen if an accident or illness rendered one of the parents disabled or unable to work.
Check your employers' policies to see what coverage is available. Discuss your benefit options with your financial professional to see if you need additional disability insurance beyond any employer disability insurance.
Each wage earner should have life insurance equal to six or seven times their annual income. A stay-at-home parent should have insurance to cover the cost of hiring someone to provide childcare, cleaning, and other services so the surviving parent can work.
Emergency Fund
While there are several ways to calculate the amount of money you should have in an emergency fund, a prudent rule of thumb is to have three to six months' living expenses to protect against layoff, disability, or other financial disaster.
If you don't have an emergency fund, start accumulating right away.
First-Year Expenses
According to a 2015 U.S. Department of Agriculture report, "Expenditures on Children and Families" (the latest data available), a middle-income family spends more than $12,000 the first year, both on ongoing expenses such as baby food and diapers and on one-time costs to equip a nursery, etc. That excludes childcare expenses, which vary widely depending on the type of childcare and location.
Cost to Raise a Child to Age 18
In 2015, that same USDA report projected that raising a child through age 17 would cost $284,570 (when factoring in inflation costs).
That's the amount that a middle-income family—with an income between $59,200 and $107,400—would spend.
The USDA also projected that a high-income family with an income of more than $107,400 would spend $454,770.
Work or Stay at Home?
Many expectant parents are unsure whether both should work or stay home with the baby.
This decision goes beyond financial considerations and has important implications for the young family's future.
Your financial professional can crunch the numbers to see how much it would cost for the second parent to work. But you might be surprised that once you factor in child care, transportation, taxes, and, for exhausted working parents, a cleaner land meals out, just how little income is left.
One parent at home might just pay off.
On the other hand, making that choice could compromise the future career prospects of the at-home parent, making it more difficult to secure employment commensurate with skills and education at a later date, so consider all the potential trade-offs.
College Savings
According to U.S. News, the average cost to attend a four-year private college in 2022 was $55,570 (tuition, fees, room, and board).
Even if your child chooses an in-state public school, the average cost is roughly $27,940.
Of course, your new baby won't be entering college for another 18 years, and few can forecast what college will cost so far out. There are several ways to save for college, and your financial professional can help you explore the options and set a budget to help the family (grandparents included) prepare for the expense.
Estate Planning
At a minimum, consult an estate-planning attorney to create a will to name a guardian for the child.
If extenuating circumstances exist (ex., if the parents aren't married or there are children from a previous marriage), then more elaborate estate planning measures might be necessary.
Retirement Planning
This point is worth stating in bold letters:
Do not sacrifice your financial security for the baby.
Keep those retirement plan contributions rolling in, even if it means cutting back on college savings. Financial aid is available to college students, not retirees.
Work With Clayton Financial Group
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Contact us today if you need help with investment, tax, risk management, estate, or other planning.
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