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Certified financial planner Amber Miller is used to thinking about the costs and challenges of her clients’ lives. It helped her prepare for the birth of her own first child last year.
“We had our daughter, Zahra, in August and we’re still head over heels with it,” said Miller, senior financial planner at The Planning Center in Minneapolis. “My husband and I had a lot of conversations so we felt pretty prepared, but our grocery bill is still double what we expected.”
Money may not be the first thing new parents think about when expecting a child, but it should be a priority. children are expensive In 2015, the United States Department of Agriculture estimated the cost of raising a child through age 18—that is, before college—at $233,610, or $12,978 per year. Adjusted for average inflation of 2.47% since 2015, that’s now $277,108, or $15,395 per year.
It’s not a crushing burden for a couple or a single parent earning more than $100,000 a year, but it is for a household earning $40,000. The three largest costs identified by the Department of Agriculture were housing costs at 29%; food, 18%; and childcare and education, 16%.
However, the figure was an average cost, and the study found large disparities in spending on children based on household income. Families with pre-tax incomes of less than $59,200 spent between $9,330 and $9,980 on children, while households with incomes of more than $107,400 spent between $19,380 and $23,380. In other words, new parents make do with the resources they have.
Zachary Bouck, CEO of Denver Wealth Management in Greenwood Village, Colorado, is always trying to ease new parents’ fear of money. “The first thing I say to clients who are expecting babies is that it doesn’t have to be as expensive as they might think — especially in the early years,” he said.
Bouck has three children himself.
“Little kids just don’t need a lot of things,” he said. The bigger problem with babies is how they affect household income.
“Does one parent stay at home and if not, what is the childcare situation like?” said Bouck. “When you make $50,000, daycare costs can be shocking.”
Regardless of their income, all new parents should set a baby budget. It helps you to prepare and control costs. Miller of the Planning Center suggests looking at it from two perspectives: the one-time cost of preparing for the birth of a baby and the monthly ongoing cost thereafter.
First, the cost of prenatal care and childbirth can vary widely based on health insurance and health conditions. If you are adopting a child or need fertility treatment, the costs are significantly higher.
The monthly cost of raising the baby includes diapers, food, formula, creams, wipes, bottles, toys and clothes, etc. “Make a list of price tags for everything, then fill it up 1.5 times,” Miller suggested before. “There are always things you don’t think about.”
Both Miller and Bouck emphasize that parents should take advantage of any available public assistance programs, such as the child tax credit, which recently increased from $2,000 for children under 6 to $3,600 and from $3,000 for other children under 18 to $3,000. Full credit is available for couples to earn up to $150,000.
I start talking about 529 plans with new parent customers right away.
Bernstein Mueller
Senior Financial Planner at The Planning Center
Also, use informal support networks of friends and family to help reduce costs. “People should be engaged with their community,” Bouck said. “You join a club.
“All of us with kids welcome new parents,” he added. “There’s a culture of giving for things like clothes and toys.”
Also, be prepared for costs to increase as your child grows. They will eat more, need more clothes, and want more toys and stuff.
It’s also never too early to start thinking about financing your child’s college education. While contributions to 529 federal college savings plans are not tax deductible, in many states they are. In addition, income in the plans is deductible when used for qualifying educational expenses.
“I’m talking to new parenting customers about 529 plans right away,” Miller said. “It’s an important behavior to build up early on.”
She suggests that parents start with small contributions and, when childcare needs end, move that money to the 529 plan.
Bouck also recommends starting college planning early, though he advises new parents to first pay off personal debt and get their own retirement plans in order. In Colorado, the state contributes the first $100 to new 529 plans and has a contribution adjustment program for low-income parents.
“I started contributing $25 a month because I was paying off student loans,” he said. “It made me feel good.”
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