“Don’t raise kids to have more than you had. Raise them to be more than you were.”
Having a newborn baby is a time to rejoice. However, the reality of raising a child can be daunting. The costs are often underestimated. Even those with the best money habits may get carried away for a new family member. We justify our spending more easily as we seek safety, comfort and fulfillment. Costs will mount if we don’t put some brakes in place in advance.
New parents must put a financial plan in place to fit their new responsibilities. To avoid financial blunders, parents should increase their efforts to save and invest, spend within our means, take a fresh look at workplace benefits and utilize tax credits.
Here are 12 tips to help you dodge potential financial mistakes:
1. Be Financially Ready With An Emergency Fund
Every household should have an emergency fund with 6 months of savings set aside for unforeseen events. It is no different when we are expanding our family. Arguably, we need this money cushion even more so.
Raising a child in the first year costs $13,186 on average.. These costs are before hospital costs which may be covered by health insurance. A LendEdu survey found that parents budgeted $9,371 for that first year, saving roughly that amount. However, this falls short of the actual amount. Diapers costs, among other items, are miscalculated.
Why Do We Underestimate?
It is so easy to be blindsided when we lack experience, especially when we are raising our newborns. Ask any new homeowner and they will share major home costs that were a surprise. That’s what an emergency fund is for.
I recall being surprised by the many purchases we had to make in a rush for our baby. We learned that the delivery date for our son was moved up about 2 weeks unexpectedly. Comparison shopping was just not an option. We were older parents but felt like helpless newbies. Excited at our upcoming birth, we acted like children in a candy store.
One of my worst purchases (ever!) was handmade Egyptian cotton linens for the crib for $1,000. I was suckered into it by a salesperson at the now-defunct Bellini’s. How ridiculous a thing to buy for a newborn baby!
We were fortunate to have ample savings having worked for several years. But I always wonder, what if we were younger or didn’t have a cushion to spend.
2. Don’t Overspend For Your Newborn’s Needs
We want the best for our children always. However, we need spending limits or go broke before they go to college. Be judicious about spending early and learn to budget. We need good financial habits when planning for our new child. Not everything has to be the best, the newest or the most expensive. Emphasize safety above all else. Plan out what is important to get initially, borrow from family or friends for some items and consider thrift shops.
Find Acceptable Price Ranges For Needed Items
Initially, you do need diapers, a place to sleep (crib or bassinet) and a car seat. There are some great sites to find average costs and price ranges for bassinets, cribs and mattresses, diapers (cloth is cheaper versus disposable) and a diaper bags, changing tables, baby monitors (audio or video), car seats, glide rocking chairs and ottomans, baby swings, and bath tubs.
What You May Need
Luxury is not a necessity. Some of your costs are one-time like baby proofing your home. Other costs will vary significantly by where you live. For example, if you are both working and want to hire a nanny the average fees can range from $400-$1000+ per week. Additionally, you may need a babysitter and their rates go from $10-$25 per hour.
The US National average for day care is $611 per month, however, in major cities like Boston or New York, it will be well over $1,000 per month. Well baby doctor visits without health insurance average $95 per visit according WebMD. Visits may be significantly higher in New York and other urban areas.
You can bulk up on baby food and diapers, however, your baby may reject some brands or tastes.
3. Avoid Lifestyle Inflation
As your child gets older and makes friends, you may feel pressed to shop for more stylish clothing and sporting a luxury stroller. Remember, young kids will size out of these things fairly quickly. Avoid throwing lavish birthday parties even though you want celebrate each year. Their friends will have fun no matter where you have the party. Of course, we do it to impress the other parents but we don’t need to.
Speaking of lavish waste, we once received a beautiful box delivered to our doorman. It was from a friend of our son’s with an invitation to a 5th birthday party that read like a wedding invitation. My jaw nearly dropped and I worried about what kind of party my son would want. The funny thing is I recall that Tyler did not have a good time at this birthday party.
4. Saving Early For College
Set up a 529 savings account as soon as you have a social security number for your child. Start saving early for college to benefit from tax advantages and compounding growth. You are not limited to the plan offered in your home state. There are many investment choices to suit anyone. Don’t get so overwhelmed at the choices that you end up not activating the account.
To read more about 529 Savings Plans and alternative savings devices for college, see our recent post here. Start with any feasible amount and continue to add to this account. Tell your child’s aunts, uncles and grandparents that you would prefer a cash present over another toy or outfit. Make them aware of your savings account.
There are several ways to save early besides the 529 Plan although that is preferable. Below, we discuss life insurance for babies and infants that have a savings component that may appeal to you.
5. Keep Up Your Retirement Savings
While saving for your child’s tuition is important, do not sacrifice your own retirement savings. Many parents do that but it is not a good idea. As much you may hate your child borrowing for college tuition, taking a loan our for retirement is a worse outcome. It is better to reduce your spending on unnecessary items to save more than face withdrawal of your retirement funds or borrowing against it.
6. How To Talk To Your Children About Money
Our children take their cues from us in a number of different ways. Start to teach your kids early about money at an age-appropriate time. They may be better able soak in how to treat and respect money values.
We should be good role models in helping them learn how to save money. Teach them to know the difference between wants versus needs. Don’t give in to impulsive purchases when they get upset. Instead delay gratification on purchases. Set a good example on investing now for future growth.
Both parents should be on the same page in this regard. My husband and I often argue from on opposite sides. He can’t seem to say no to the kids so I play the heavy parent. However, my kids just ask me less for things and go around me and get what they want from Dad. I think I just admitted that my kids manipulate us. (They do!).
7. Your Employee Benefits Need A Fresh Look
Once you have a child, it is a good time to take a fresh look at your employee benefits package. What may not have jumped out at you when you first started working there, may be more important now for your growing family.
According to Harvard Business Review, when making a decision between a higher paying job or lower paying job but better benefits, health insurance (88%), more flexible hours (88%) and work-from-home options (80%) scored the highest in their survey.
Childcare Are Among Our Largest Expenses
The cost of child care is high for those who are working and need support. According to Care.com’s 2015 Cost of Care Survey, 28% of families pay more $20,000 annually for this. Childcare is the largest expense for many families and may even surpass college tuition and housing costs for some families.
Among the employee benefits that can lift some of working parents’ burden are dependent care assistance, child care financial support by way of tuition assistance and scholarships, long term care resources and referral. Back up child care is also key when the nanny is ill. Onsite child care centers are often offered by companies that have large campuses.
8. Flexible Spending Account (FSA)
If you have a health plan through your job, you can use a flexible spending account to pay for co-payments, deductibles, some prescription and non-prescription drugs and other out-of-pocket health care costs. The FSA is a savings account with tax advantages.
This account allows employees to contribute a portion of their pre-tax earnings to pay for qualified expenses. Employees have limits of $2,650 per year per employer. If your spouse has an FSA at their employer, you can put in an additional $2,650 per year. It is a “use it or lose” plan. Your FSA does not earn interest.
Another type of FSA is a dependent-care flexible spending account which is used for childcare expenses for children age 12 or under. The maximum dependent care FSA contribution is $5,000 per household.
Making use of these accounts may provide you with beneficial cost savings.
9. Health Savings Account (HSA)
The HSA is similar to an FSA as it provides tax advantages. HSAs are associated with high deductible health insurance plans which are often used by the self-employed. Like the FSA, you can contribute your pretax earnings, making your contributions tax-free. Here, the contribution limit in 2018 was $3,450 for an individual or $6,900 for family coverage.
Unlike the the “use it or lose it” feature of FSA, you may rollover the unused contribution to the next year for the HSA. Your account earns interest and if you leave the job you may take the account with you.
10. Life Insurance Is Essential For Growing Families
To protect your growing family, you need to have life insurance coverage. You may have a starter plan from your employer but generally the amount is insufficient, especially with young children. In the event of the passing of the main earner of the family, your life insurance should cover your fixed living costs as college tuition and other child care needs depending on their ages.
Should You Have Coverage For Your Newborn Or Infant?
Generally, you don’t need to buy life insurance for your baby. Hopefully, they are healthy and they don’t have earnings streams to protect.
Among life insurance providers, Gerber Life Grow-Up Plan has some attractive features:
1. Parents, grandparents or permanent guardians may purchase this plan. It is whole life insurance of $5,000-$50,000 of coverage. They may apply for their newborns or infants when they are 14 days to 14 years.
2. As a whole life insurance policy, there a cash value portion that accumulates as premiums are paid. According to Gerber’s plan, coverage doubles during the child’s 18th year at no extra cost. Additional coverage may be bought as needed.
3. It guarantees insurability and locks in an affordable premium for a child at a young age. For families with high risk of medical issues, this may be an important benefit.
4. With a whole life insurance policy, it provides death benefits plus you are building cash value in a tax-deferred manner. This savings component can be used for college tuition. The policy may be surrendered for its cash value.
True, the death benefits is a bit macabre and hopefully not needed for children.
I don’t believe life insurance for babies is needed. I have read some criticism of Gerber’s plan. Despite having a longstanding good brand name for baby foods, review the details carefully. Look into the fee structure for additional insurance coverage, its tough cancellation policy, and how slow the cash surrender value actually builds.
Although this plan has some appeal, I prefer 529 Savings plan for college tuition and it is debatable if life insurance is needed for babies.
11. Several Tax Benefits For Your Children
Our children may be helpful when it comes time to pay taxes.There are a number of different tax credits that you can use if you have a child. Check with your tax professional for possible changes associated with the 2017 Tax Law.
Child Tax Credit
You may be able to reduce your tax bill up to $2,000 for each of your qualifying dependent children under age 17. The credit is intended to offset the cost of raising children. Parents may get the maximum amount with qualifying incomes (married couples who make under $400,000 or single persons under $200,000).
There is a $500 non-refundable credit for qualifying dependents (eg. an incapacitated parent) other than children.
As a tax credit, it reduces your taxes dollar-for-dollar. If you do not benefit from the full amount of the Child Tax Credit (because the credit is greater than the amount of income taxes you owe for the year), you may be eligible up to $1,400 for a refundable amount.
Child And Dependent Care Tax Credit
Paying for childcare and dependent care can be quite expensive. The Child and Dependent Care credit can be worth from 20% to 35% of up to $3,000 of child care (or $6,000 of expenses for two or more dependents) related to some or all of the dependent expenses you paid. The higher 35% is for incomes below $15,000.
This tax credit may help you defray childcare costs for dependent children 12 years or under. For dependents, other than children, the IRS requires that they must have lived in your home more than half the year.
Adoption Tax Credit
There is a federal adoption tax credit up to $14,080 per child for finalized adoptions in 2019. This is not refundable so you can only use it if you have federal tax liability.
This credit may be used for qualifying expenses you paid to adopt a child. These expenses include adoption fees, attorney fees, court costs, traveling expenses (including lodging and meals while away from home), and other expenses directly related to the adoption. You would need to have supporting documents that you received If you claim this credit.
American Opportunity Credit
Tax credits are for qualified education expenses for an eligible student for the first four years of higher education. The maximum amount you can claim is $2,500 per eligible student per year. The amount of credit is 100% of the first $2,000 of qualified education expenses you paid for that student. However, if the credit pays down your taxes to zero, you can have 40% of the remaining credit (up to $1,000) refunded to you.
There are income limits to claim full credit with modified adjusted gross income pegged at $160,000 or less for married couple filing jointly (or $80,000 for a single filer). The American Opportunity Credit is preferable, however, if you don’t qualify, you can try for the Lifetime Learning Credit.
Student Loan Interest Tax Deduction
You may be able to claim the Student Loan Interest Deduction for interest paid on a qualified student loan, even if you choose to claim a student tax credit. If you decide to claim the deduction, you could reduce your taxable income by up to $2,500 of the student loan interest you have paid for your dependent child. You don’t need to itemize your deductions to claim this deduction.
To qualify for this deduction, see respective modified adjusted gross income limits.
12. Estate Planning
The best time to think about your plan is when you don’t have a compelling reason to do so. When you are raising children, it is a great time to be thinking of your family’s best interests.
Set Up Your Designated Beneficiaries
By creating your estate plan, you will have control over your asset distribution during your lifetime to your loved ones. A significant portion of your assets can be easily transferred to your intended heirs. This will help you to avoid often painful and lengthy probate court procedures.
When setting up your beneficiaries, think carefully whether to identify for your children as there may be complications for you to be aware of and we discuss here.
Creating a will, possibly a trust, and advance directive documents will help you with the rest of the way. Read our guide to basic estate planning in 6 steps.
Make sure to consider your digital assets as part of your estate. We have addressed why you need to make an inventory of digital assets here.
Planning for a newborn is essential. It is an exciting time in your life and it is easy to get overwhelmed. We have all been there and made mistakes, especially financial ones. Hopefully, this will help you can avoid some of the more obvious errors by organizing well ahead of time.
Hearty congratulations to you and your expanding family. What steps have you taken to prepare for your child’s experiences? What mistakes did you encounter that you may want to share with us? We look forward to hearing from you!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.