If you’re thinking about starting a family, or a baby is already on the way, you’re probably bracing yourself for months of sleep deprivation, dirty diapers and Barney.
You also probably wince every time someone tells you that “a baby will change your life.” Well, it will, including your personal finances.
According to the U.S. Department of Agriculture, a child’s first two years, on average, could set you back nearly $16,000 once you add up the cost of Junior’s food, clothing, housing, transportation, health care, child care, toys and—yes—even entertainment.
Of course, prices will vary by location, and some costs—such as transportation and housing—you may already be paying. There’s little doubt your biggest expense will be child care if both parents plan to continue working, and that can run close to $1,000 per month in some major cities.
The bottom line: You really can’t put a price on parenthood, but you do need a plan to manage your new expenses and responsibilities.
Take advantage of this time before the baby arrives to get things in order concerning your job, insurance and budget plan. If you and your spouse discuss and agree on expectations, goals and strategies now, you can avoid money arguments and stress later. After all, you don’t want baby to pick up on any tension.
If you pay off your high-interest debt before baby arrives, the money you were spending on interest and monthly payments is cash in your pocket—not to mention you’ll create a more stable financial environment for baby. For example, say you have a $3,000 balance on your credit card charging 18 percent interest. If you’re just paying the minimum $60 each month, it’ll take you nearly 37 years to pay it off and cost you almost $8,000 in interest. But if you paid $300 a month, you’d have that debt paid off in 11 months and pay only $275 in interest charges.
Look at where else you are spending your money and make getting out of debt your number-one priority. If you can’t pay off your cards before delivery, try to pay them down as much as possible. Then after baby arrives, you can make smaller payments until your budget stabilizes again.
Shopping for baby is a lot of fun. Throw in "proud papa zeal" and "pregnant mama hormones" and you have a recipe for overspending.
Before you lay down a dime, know your needs and wants, and determine how much you’re willing to spend. Pick up a copy of Baby Bargains by Alan and Denise Fields for reviews on hundreds of baby products, and advice on choosing the must-haves (see the box at right) and avoiding the probably-nots. You can also read consumer reviews of baby products online. Then, leaving your money and credit cards at home, wander through a baby store just to try the items out—push around a stroller, adjust the straps on a car seat, try setting up a play pen.
Once you’ve settled on your list, schedule your purchases. You have 40 weeks after all, so there’s no reason to stress the checking account trying to buy everything at once. A good strategy is to buy things gradually over, say, the last four or five months. (You don’t want to buy much until after the fifth month if you plan to find out the sex of the child, or if you have a history of miscarriage.) Whether you ultimately buy online or in person, make sure you know the store’s return policy. Target, for example, has a 90-day limit on returns, so if you buy something too far in advance and you change your mind after baby’s arrival, you could be stuck.
You and your spouse will probably want to take some time off after the baby is born, so you’ll need to know the leave policies at your jobs. Few companies offer fully-paid maternity or paternity leave, so find out if you can use sick days or vacation time.
New moms and dads who have worked for a company with 50 or more local employees, have been on the job at least one year and have worked at least 1,250 hours (about 25 hours per week) are entitled to up to 12 weeks of unpaid time off, thanks to the Family and Medical Leave Act. And you’re guaranteed your job back at the end of your leave.
It’s important to work out an amicable leave with your employer so you will be welcomed back, even if you think you might not return to work. “Be as honest as you can with your boss about your ideal plan for after the baby is born,” says Cindia Cameron, organizing director for 9to5, the National Association of Working Women. “But you don’t want to resign. You just never know what might happen.”
It’s hard to predict how you’ll feel once your baby is here, or to foresee any unexpected medical problems that could add financial pressure to even the most well-thought-out plan. And if you quit, you could forfeit any paid leave that you’ve earned—or even your health insurance benefits, says Cameron. Best to wait until you are 100 percent positive you won’t be returning to notify your employer. You have until the end of your leave period to make your final decision, but make sure you give your boss plenty of time to find a replacement if you aren’t coming back.
It makes sense for most moms-to-be to hold off telling their bosses of their pregnancy until after the first trimester, when the risk of miscarriage goes down. But you don’t want to wait until you’re obviously showing.
Of course, circumstances may dictate a different strategy. When I was pregnant, I was so green with morning sickness, concealing my news in an open-cubicle office was practically impossible. Fortunately, my boss was very supportive.
If you’re worried your employer might not welcome the news, consider holding off your announcement until after a salary performance review to make sure it doesn’t influence how you’re treated. Also, suggests Cameron, you can time the announcement around the completion of a big project to show your boss how valuable you are to the organization.
If you plan to take any unpaid time off work, you’ll want to have enough money in the bank to cover your weeks of lost income. Your new world may revolve entirely around baby, but you’ll still have to cover rent, buy food and pay your other bills.
And if either you or your spouse plan to stay home with the baby indefinitely, make sure you can afford to live on one income and adjust your spending habits now. Practice living on one paycheck to give the arrangement a test-run, and use the other paycheck to pay down debt and beef up your savings. Chopping your household income cold-turkey could equal disaster if you’re not prepared.
The startup costs of having a baby may be steep, but don’t forget the extra day-to-day costs your little bundle of joy will bring: Diapers, food, clothes, health insurance, photo developing, baby sitters, laundry and even utility bills because you’ll probably spend more time at home.
As a rule of thumb, the Consumer Credit Counseling Service suggests you plan on spending at least an extra $200 a month. If you’ll need to pay for child care, a bigger house or a new minivan, you’ll need to budget more. Examine your budget to identify areas where you can cut back to make room for the extra expenses.
You probably didn’t need life insurance as a single, or even as a couple. But now that you’re going to have a family that relies on you for financial support, it’s a must.
Generally, you should buy enough coverage to equal 8 to 12 times your income, says Bob Bland, CEO of insurance brokerage Insure.com. Stick to the higher end if you’re the sole breadwinner; the low figure may be enough if both spouses work. Even stay-at-home spouses need their own policy to help pay for child care in case of their death.
You can probably put off making the purchase until the final trimester. Don’t worry. Being pregnant generally won’t influence your rate because the risk of dying in childbirth is low. But look for a company that will base your premium on the mom-to-be’s prepregnancy weight and cholesterol.
If you’re thinking about getting pregnant, make sure you have health insurance and know exactly what’s covered.
If your current plan doesn’t meet your needs, consider switching—but make the switch before you get pregnant, or you could run into problems getting new coverage. You might be able to switch to a different plan offered through your employer (or switch to your spouse’s plan) during open enrollment periods. The key is to plan ahead and understand your options.
Also, make sure you budget for the increase to your health insurance premium as you upgrade your coverage to a family plan. A recent study of employer-sponsored health plans by the Kaiser Family Foundation found that the average monthly premium for a family plan cost nearly three times the premium of a single policy.
If you think raising your child is going to be expensive, consider the cost of shipping Junior off to college. The average price tag of private college tuition is expected to run well over $250,000 by the time today’s newborn is ready to head to campus. But with a little planning and saving now, you can ease the future sting.
First and foremost, though, you need to make sure you’ve paid off any high-interest debt, you have enough money saved for emergencies, and that your retirement savings is on track. After all, there are loans to pay for college, but not your retirement. Once your finances are in order, you’ve crossed off the other items on this checklist, and you have some money left over, then consider college savings options.
According to Alan and Denise Fields, authors of Baby Bargains , the average amount parents spend on food and gear alone in baby's first year tops $6,200. The Fields suggest a more sensible budget for these must-have baby items:
TOTAL = $3,935