This blog post is excerpted and adapted from one of the free Delta Community Financial Education Center live workshops, 9 Financial Tips for New Parents, which is being presented this month and is available to both Credit Union members and the general public. Please visit the Financial Education Center's Events & Seminars page to register for its monthly, no-cost webinars with practical, actionable advice on managing personal finances, including saving and spending suggestions. The work of the Financial Education Center reflects Delta Community’s mission to help both its members and others in the community achieve financial success.
Please consider that the Financial Education Center workshop related to this post dives much deeper into this topic, and we recommend that anyone interested in the financial aspects of a new child look into attending the Financial Education Center’s presentation if they have time.
Getting ready to be a parent
Becoming a parent is the most life-changing event that many people will experience. You are suddenly not only responsible for yourself but also for another person who depends on you for everything in their life. Whether you are expecting a child or are currently adjusting to your new life as a parent, this post could be a useful starting point for adapting to your new financial reality. Thinking through and making the necessary financial arrangements now can minimize stress in coming years and allow you to spend the most time loving and caring for your newborn.
When getting ready to embark on this exciting new adventure of parenthood, thorough preparation is key. Both before the baby arrives and in the weeks after, it’s especially helpful to be ready for the financial changes to come. According to the most recent study in 2015 by the U.S. Department of Agriculture, it’s estimated that total child-rearing expenses from birth to age 17 for a middle-income American family would be $233,610. Although the range of child-rearing expenses across different families is wide, the fact is that adding a young person to the family is quite expensive.
Important financial decisions and actions for soon-to-be or new parents
What are some of the most important financial activities when adding a child to your family? Well, there can be hundreds of money-related decisions and tasks involved over years of raising a child, but to keep things simpler and manageable, we’ll focus on nine key financial areas to consider when beginning or growing a family.
- Rigorously assess your current financial situation.To better understand where you plan to go financially, it’s essential to know where you are now and have a detailed view of your finances. The first step is an assessment of your finances, including whether you have a job that offers a variety of healthcare and other benefits essential to the welfare of a child and the family. Job benefits to investigate and use as needed are parental (both maternity/paternity) and personal/sick leave, healthcare and insurance. You should confirm your job’s leave policy if you plan to take time off for your newborn. The federal legislation known as the Family and Medical Leave Act (FMLA) grants all parents 12 weeks of leave, but not all employers offer compensation during this time. Find out if you can expect to receive a salary while you’re out, and plan accordingly.
- Know your discretionary income—it’s your net income minus fixed recurring expenses, and also minus short-term emergency savings and long-term investment savings. Take your paycheck after taxes and subtract your bills from it. Divide that amount by seven or 14 days or whatever your pay period is. What's left over is the amount you can spend every day. Knowing this number gives you an idea of how much you will have to use for new child-rearing expenses. If you consider the $233,610 it may take to raise a child from birth through age 17, that breaks down to $1,082 per month. Either keep or start saving now for the usual childcare expenses, such as a crib, stroller, car seat, diapers, food, clothes, toys, and, if you plan to go back to work, childcare. Avoid accumulating credit card debt if possible, and try to fund future retirement.
- Update or create a household budget. A household budget needs to be managed for a new child, and if there is no current budget, it’s important to create one to manage expenses. It will be helpful to understand what “upfront costs” (such as a child car seat) may be a temporary hit to your wallet and what recurring costs will influence your budget in the long term. Because parenting is an adventure that can bring you to the zoo one day and a hospital’s emergency room the next day, being financially prepared for the unexpected when you have children is necessary. Be prepared for changes to your budget, which may vary quite a bit as you plan for additional monthly costs like baby food, formula and diapers. As your children get older, you may enroll them in classes and sports and you will need to budget for that. Taking the time to start planning for those things now will make it easier to adjust as your children grow up. Consider the effect of ongoing lifestyle changes that you will need to account for in the budget. Activities such as a vacation or how much time you spend on hobbies will change. Vacations may be more expensive because you need to buy an extra plane ticket, or you might save money on paying greens fees if you have less time to play golf. Build these changes into your budget as you plan ahead.
- Add your child to your health insurance plan. With a new child, you might think that your health insurance provider (which you may have through your work or separate from it) might contact you or automatically add your newborn to your health plan. But neither of those activities usually occur; you have to take actions to make them happen. Having a baby is what’s known as a qualifying life event, which allows for an enrollment period during which you can make changes to your health policy or enroll in a new one. Most health plans typically require that your child is added within 30 or 60 days post-delivery. If they are added during that time period, then your child should be covered retroactively—meaning anything that would typically be covered under that policy that occurs between birth and enrollment would be covered. For the first one or two children, be aware that adding them to your health insurance policy generally means that the increase in monthly premium will reduce the amount of your take-home pay.
- Invest in life insurance. New parents should consider investing in life insurance, but first should question if it’s really worth an ongoing investment that may last for many years. If you’re at a point in your life where a spouse, child or other family member relies on you financially, then the answer is simple: it definitely is. Like other forms of insurance, in exchange for a monthly premium, life insurance is designed to financially protect you and your family against worst-case scenarios. What many people don’t realize is how affordable life insurance—specifically, term life insurance—can be. For young and healthy adults, term life policies can cost less than many music or video streaming services per month, providing the financial protection your family needs in case an unexpected tragedy were to occur. Because the amount of recommended coverage varies by many factors, life insurance calculators can help you determine the appropriate coverage for your family and purchase a policy accordingly. Both parents should have a life insurance policy in place to help cover expenses if one of you were to pass away. Even if you are not working, you should have a life insurance policy to help defray the additional costs of childcare. You can also get a policy large enough to cover the costs of college.
- Create a Will and name beneficiaries on your financial accounts. In the event of your untimely death, it is critical to have arrangements in place for your children. A Will provides a plan for the division of your assets and also designates a legal guardian to care for your children. Most people name their children or surviving spouse as the beneficiaries of their accounts, ensuring that any assets or money they have is given to them. You may also choose a separate guardian of the estate, who will manage the accounts and assets until your children reach legal age. A notarized Will can help avoid lengthy legal battles contesting who owns your assets and help define how your children will be cared for. You can change your Will and beneficiaries at any time, which you may wish to do if you have additional children in the future. Also, don’t forget to add beneficiaries to all of your financial accounts (savings, checking, retirement, brokerage, etc.). This is an easy thing to do, and beneficiary designations ordinarily take precedence over wills—if the beneficiary designations are different than what is in the Will the law will support the beneficiary designations.
- Save for your own retirement. With so many things to remember about your child, it is easy to forget about yourself. However, just like airline flight attendants tell you during their post-boarding safety instructions on a plane, you need to put on your air mask first—and then proceed to help others. Saving for retirement reduces possibility your child will need to support you later in life. Consider taking advantage of any employer-matching 401(k) contributions, and set up automatic withdrawal of your retirement contributions. This will help eliminate the mental hurdle of thinking about saving each month. Prioritizing your own retirement now will prepare you and your child for the future.
- Start saving for your child’s college tuition. According to the non-profit College Board in 2022, the average annual tuition and fees for private four-year institutions were $32,410. While it might not feel like an immediate priority, the sooner you start saving for school, the more options your child will have. A common way to save and invest for kids’ education is through a Coverdell Education Savings Accounts (ESA) or 529 plan—tax-advantaged savings plans that can be used for qualified educational expenses. These plans have historically been used to pay for college-related expenses; however, now some of them can also be used for qualified expenses earlier in your child’s life, such as private K-12 education. There are numerous 529 plans to choose from, and the specific tax incentives vary by state; research the best option for you. Once you have a child, you should begin setting aside money to cover college costs. Getting out of debt may take priority over this for a short time, but saving for college through a 529 plan or similar tool can help your child get off on a solid start without accumulating a lot of debt.
- Get all the child tax deductions you can. There are tax benefits to having a child. You may be able to claim an additional person on your taxes, claim a portion of the childcare expenses and use the federal Child Tax Credit. When you have a child, you may want to change your current withholding amount on your paycheck. Use the U.S. Internal Revenue Service (IRS) withholding estimator to determine if you should change the amount you are currently having withheld or speak to your financial planner. Other significant tax-saving opportunities for new parents to consider are the Earned Income Tax Credit and the Child and Dependent Care Credit.
Interested in more advice on children and money?
The Credit Union’s blog has more information that could be educational and helpful:
How to have good BALANCE
BALANCE is a financial education and counseling organization that offers free services to Delta Community members. Some of its services include credit report reviews, debt management, and information on budgeting, money management and home buying.
Visit the BALANCE website to learn about their education and assistance programs. Members can also speak with certified credit and housing counselors to get personalized guidance. Note that the services offered through BALANCE are separate and distinct from any business conducted with Delta Community and are not guaranteed by, nor are they obligations of, the Credit Union.