Parenthood is one of life’s greatest responsibilities and, for many, one of its greatest joys. Having an infant who is entirely dependent upon you and knowing that you have to provide for this new little person all the way through their childhood and into adulthood is a heavy responsibility, but a path that brings joy as well.
Many of those responsibilities are financial in nature. Children are quite simply expensive, with the USDA reporting that the average cost of raising a child to adulthood in America is $233,610. In a nation where the median household income is $68,703, that’s an incredible financial commitment.
With such a commitment comes difficult questions. How will our finances change after our child is born? What does child care really cost? When should I start saving for my child’s college education? Let’s dig in and find answers.
What are the financial changes you can expect after having a child?
My wife and I are expecting our first child in May. We know that our financial situation will radically change after she is born but I can’t find any dollar-for-dollar examples of that change. What exactly changed for you after having kids in terms of real dollars?
The birth of our first child occurred before our financial turnaround, as I noted in the story of the founding of The Simple Dollar, so my financial records from that time aren’t as strong as they could be. I was able to track down some bank and credit card statements and here’s what I could piece together.
The new expenses in the immediate months after the birth of our first child centered around child care, which added up to about $700 a month, and baby supplies including diapers and formula, which added up to about $100 a month. We had excellent medical coverage, so wellness checkups for our baby and for Sarah had no out-of-pocket costs. We also had a huge supply of baby clothes, blankets and other materials that we needed thanks to baby showers. Our energy costs went up about $25 a month, mostly because we were staying home more.
However, some of our expenses went down in the months immediately after the birth of our first child. Our food costs went down substantially, around $400 a month. This was because Sarah and I drastically cut down on eating out. We previously ate out a few times a week, but we migrated quickly to making meals at home and getting takeout perhaps once a week. Our entertainment expenses went down by about $150 a month from what I can tell from a few months of data, mostly because we went out a lot less and stayed at home more.
The problem is that, all told, our expenses went up more than they went down. This is a consistent problem for new parents. Even as their life changes in ways that reduce spending, the child itself introduces a whole host of expenses, starting with child care but also including things like diapers and formula and, in many cases, medical costs and clothing and other supplies.
Having a child is expensive, and even though some expenses will decline due to natural lifestyle changes, it probably won’t be enough to make ends meet. My strong suggestion is to start taking steps now to prepare for the costs of raising a child. Start mastering food preparation at home now so that you’re adept at cooking inexpensive meals at home later. Start shopping around for the baby equipment you’ll need right away. Start looking for affordable child care right away, and consider outside-the-box solutions like trading off child care with friends. Know what you have for health insurance in terms of newborn and child care, as well as postnatal care for the mother, and what you may need to supplement it.
Do it now, while you have plenty of free time, because you’ll find that a newborn devours a lot of energy and time from both parents. You’ll want to be as ready as you can be for the baby to arrive.
How much does child care cost?
My partner and I are expecting a child in April. We have been evaluating child care options and they are incredibly expensive. The cost of child care for our baby will be more than what I bring home. But I am scared of quitting my job because I will fall behind in my career. Is there a solution that financially works that I’m not seeing here?
The up-front cost of child care is extremely intimidating for new parents, but there are several important factors to consider that help soften the blow.
First, having a child means you have a new dependent in your home, which means a significant reduction in your income taxes. You’ll be eligible for the Child Tax Credit, which provides a tax credit of $2,000 (meaning you’re literally paying $2,000 less in taxes and get to keep that instead). You’ll also be eligible for the Child and Dependent Care Tax Credit, which will provide another tax credit of $1,050 — assuming that you’re a relatively low income-earner, as some of these credits don’t apply for very high income earners.
Second, having a child is going to result in some lifestyle changes that will cut costs in other areas of your life. You simply won’t be able to go out as much as you once did, meaning you’ll prepare more meals at home (much less expensive) and likely see a significant reduction in entertainment expenses and travel expenses. These gains may be blunted somewhat depending on your social distancing practices during the COVID pandemic, but they’re still impactful.
Third, for a while, you simply won’t have time or energy for other endeavors that you may have once spent money on. Many of your hobbies will go dormant, at least for a while, so the things you may have spent money on for entertainment in the past will be naturally reduced.
While these will not add up to enough to absorb the cost of quality child care, they will most certainly make the transition much easier.
An additional thing to consider if you’re concerned about falling behind in your career is the Family Medical Leave Act, which would enable you to take a year of unpaid leave without actually losing your job. This would enable you to get through the first year of child care, which is typically the most expensive year, without actually losing your career foothold.
When should we start saving for college?
Our son just turned 4 years old. He will be starting preschool in the fall. The start of school for him has left us thinking about college. My parents paid for most of my education, while my husband was basically on his own. We want to be able to help him at least a little. Some advice seems to say to start saving now or when a child is even younger. Is that really necessary?
It depends entirely on your goals.
Your child will be 18 in 14 years. If you put away $1,000 now and invested it properly with a 7% annual rate of return, you would have approximately $2,600 set aside for him. However, if you wait until he’s 10, you’ll have only eight years until he’s of college age, so putting away $1,000 then would give you only approximately $1,700. You lose $900 by waiting, in other words.
The point of this is that the earlier you save for your child’s education, the more time it has to grow. This is extremely important if you want to pay for a large part of your child’s education, because it means your savings simply goes farther. It’s a foundational principle of saving for your child’s college education: start early, because it gives compound interest more time to work its magic.
There’s an obvious problem here, of course: the younger you are, the earlier you are in your career, and the lower your salary likely is. Putting aside $1,000 today is probably harder than putting aside $1,000 in six years. Using that $1,000 now in other ways is likely to give your four year old more enrichment opportunities in the moment.
How do you balance these two things? The easiest solution is to start saving now, but start saving small. Put aside regular small amounts for your child’s education — say, $25 or $50 a month. Open a 529 college savings plan in their name and set up an automatic transfer to move that money over without lifting a finger.
If you put aside $50 a month for your child in a 529 college savings plan, invested as described above, your child will have just shy of $14,000 in the account when they’re ready for college. Not only that, the earnings in that account are tax free if they’re used for educational purposes.
What’s the game plan? Open a 529 college savings plan for your child as soon as possible and start contributing something automatically, even just a little. When you have windfalls, add a little more to that account as a one time bonus. When your income goes up, increase the amount you’re contributing each month. When your child is 18, they’ll have a nice amount of money set aside for them.