Are you ready to grow your family? Whether you’re just thinking about the future or looking at a due date that’s just a few months away, it’s critical to prepare as much as possible. We won’t tell you which car seat to buy or how to decorate your nursery, but we do have some practical advice on how to prepare for some of the most important financial aspects of parenthood.
It all comes down to thinking ahead, defining the new baby-related expenses, and making as many contingency plans as possible. You may also need to modify your budget to accommodate additional costs and take care of insurance and estate planning.
It might sound like a lot, but it doesn’t have to be overwhelming. We’ve got five simple budgeting tips for parents that can help you feel completely prepared to manage the finances for your growing family.
Budgeting Tip #1: Calculate the Overall Costs
Babies are expensive — recent estimates say it costs more than $21,000 per year to raise a child from birth to age 18. Your total costs may be even higher than that if you adopt or use fertility treatments to expand your family.
That means you need to make sure your finances are prepared in several different areas:
- Budget
- Parental leave
- Childcare
- Health insurance
- Income
- Life and disability insurance
- Estate planning
It might look overwhelming, but that’s why planning ahead is so important. Creating or modifying your budget is a good place to start.
Your budget should include daily-to-day expenses, like the cost of diapers, formula, and doctor’s visits (depending on your insurance plan). It’s also important to think about some of the larger financial responsibilities, such as saving for college or paying for childcare.
When you’re working on your budget, don’t forget to think about contingencies. You can’t plan for every possibility, but making preparations can reduce the financial impact of unexpected situations. And remember, babies grow fast. Their needs will change as they do. Be sure to revisit your budget often to accommodate those changes!
(If you’d like to learn more about financial planning for parenthood, we’ve got a two-part blog series for you. Read Part 1 and Part 2 for all the details.)
Budgeting Tip #2: Analyze and Adapt Your Current Spending Habits
Does your current budget have enough room for the expenses of parenthood? A baby can significantly increase your monthly expenses, and you don’t want those costs to come as a complete surprise.
Those initial costs when you have an infant can add up quickly. Diapers, formula, and cute little clothes aren’t inexpensive. And there may be other costs — you might want to set aside some extra money for grocery delivery or takeout to combat the stress and fatigue of those first few months of parenthood. Even minor expenses add up over time, so the more you can prepare, the better.
But you should also be looking ahead to think about all the additional expenses that your baby will bring. And if you’re spending more than you make now, it’s crucial to make some changes before you have even more demands on your income.
If you have lots of extra money left over each month, think about what you want to do with that. Do you want to start a college savings account for your child or bump up your emergency fund? Make decisions that align with the values that are most important to you.
Budgeting Tip #3: Plan Out Parental Leave and Childcare
Are you and your partner going to take some time off when the baby arrives? Do you have access to paid parental leave? If so, that’s wonderful! We’d definitely encourage you to take as much parental leave as possible.
If you don’t have access to paid maternity/paternity leave, it’s time to run some numbers. How much time do you want to take? Will that leave be completely unpaid, or will you earn a portion of your salary?
For example, you may qualify for short-term disability leave. Many companies offer this as part of their benefits package, and you might be able to use it to take some time off while still earning part of your salary.
After your parental leave ends, what’s your plan for childcare? If you or your partner plan to quit your job and stay home full-time, can you pay all your bills on just one income? If not, rework your budget!
If you and your partner will continue in your current jobs, what’s your plan for childcare? Unless you have family members who live with you or who volunteer to help out for free, you’ve got to budget for a nanny or daycare provider at least until your child is old enough for preschool or kindergarten.
Budgeting Tip #4: Grow Your Career and Income
Your earning potential might not be the first thing you think about when you’re budgeting for a baby. But your 20s, 30s, and 40s are the decades when your “human capital” (your ability to work) is one of your biggest financial assets. That means you need to take career development into consideration when you’re thinking about childcare and budgeting.
For example, if you take a few years off to be home with your baby full-time, your income during those years will change. But how will that impact your job growth potential when you return? Will it set you back on your career track? Or will you be able to jump back in where you left off?
Depending on the answers to those questions, you may want to consider different income options. Is it worth trying to find a way to change careers or switch to part- or full-time remote work so you can be home without losing your income? There’s no right or wrong answer — the point is to consider how having a baby will affect your long-term earning potential and make decisions accordingly.
Budgeting Tip #5: Prepare for the Unexpected
It’s not fun to think about potential emergencies, but it’s crucial. That means spending some time to consider your health insurance, disability insurance, life insurance, and estate planning. And as your family grows, what you need may change over time.
Let’s start with health insurance coverage — do you have the right type of plan? For example, can you handle the financial hit of a high-deductible plan by contributing to a health savings account, or would HMO coverage be better?
Next, think about what happens if something goes wrong. Do you have long-term disability coverage? This type of insurance would ensure that you could still receive some income if something affects your ability to work.
And if the worst happens, do you have a good life insurance policy? Do you have a comprehensive will that includes guardianship instructions for your child? If not, take care of that as soon as possible. It’s also a good idea to give a trusted person power of attorney to make financial and medical decisions for you if you become incapacitated.
Plan Ahead to Get Your Finances Ready for Parenthood
Having a baby is so exciting, but it can also be financially stressful. Fortunately, you can relieve a lot of that stress by planning ahead. With a comprehensive budget, insurance coverage, and a thorough estate plan, you can feel confident that your child will be protected no matter what happens. And if you don’t have any of that in place yet, start with the budget and work from there.
Want an expert financial planner to help you get ready for this next phase of life? At Guiding Wealth, we offer one-time financial planning services that give you all the benefits of professional support without a long-term commitment. A single affordable fee gives you the chance to meet with a planner, discuss your financial goals, and leave with a customized plan to reach them. We even have an option specifically designed for expecting parents. Get your Baby Budgeting Plan today!