Having children is going to cost you. Establish your nest egg early on, and your bottom line will be better for it.
Nashville mom Courtney Thomas is often astonished by how fast money seems to just fly from her wallet when it comes to her kid’s needs. “I was prepared to spend some money on the obvious, but the diapers and formula are what shocked me the most,” says Thomas. “I can’t believe how expensive it all is … and how quickly you go through it. It seems like we’re buying new clothes to replace the outgrown ones every other week,” she adds. You probably wouldn’t trade your baby for a million dollars, but did you know that you may spend half that to raise him? According to the US Department of Agriculture and statistics about college financing, it costs almost half a million dollars to raise a child from birth through college. While this number may seem astronomical, certain skills can help new parents confront costs more than just buying stock in Pampers.
It’s the dreaded “B” word – budget. While it may seem unbearably boring, you need to “have a budget that’s accurate, review it monthly, and eliminate the hundreds of dollars wasted every month,” recommends Mary Staton, coauthor of Worry-Free Family Finances (McGraw Hill; $14.95). Lots of people are uncomfortable with the notion of a budget – it almost sounds like a diet. But for a new parent, a budget is the best tool you can use to get a grip on how much you’re currently spending and where you can make cuts to save money. Create an accurate budget to see what your pre-baby costs are, and look for ways to trim your costs before the baby comes. Start simply by listing your monthly bills and expenses compared to how much income is made each month.
Anticipate Your New Expenses
You mean that sweet li’l bundle of joy is going to hammer my wallet? Well, maybe, if you’re not prepared. “The best and most simple way to prepare for a new addition to the family is to plan ahead,” says Sheri Provost, co-author of The Guide to Financial Freedom at Any Age (Abacus; $15.95). “Identify what additional expenses you will incur with the new baby.”
But how do you know what expenses your new baby will bring to your family? “Talk to your friends to find out what their monthly baby expenses are,” suggests local financial guru Dave Ramsey, author of The Total Money Makeover (Thomas Nelson; $24.99). Price out the actual costs of items such as diapers, formula and baby food in the stores. Estimate how much you will use per month. Add in costs for clothing and toys as well.
Plan for the larger costs as well, such as a crib and high chair, by saving money in advance to pay for those purchases. While these large items may seem like the ones that will hit you the hardest, many parents find that not to be the case.
Think About Spending Differently
While most expectant mothers daydream of a picture-perfect nursery and a baby dressed in the cutest boutique-bought clothes, thinking about these expenses realistically can help keep your costs in check.
“When we had our first daughter, I would just buy things that caught my eye for her without even thinking about it,” says Brentwood mom Ellie Tansey. “But now that we’ve got three daughters, it’s become clear to me that all of that isn’t worth spending money on when we’ve got three girls to put through college.”
Keeping things in perspective and saying, “No” to some of the expensive toys and clothes can help. Instead of new, think about buying used – consignment stores and sales are great for finding deals on children’s clothing and accessories.
The frugal approach will continue to work as your child grows. With the rate at which children change interests and activities and grow out of sizes, buying all-new sports equipment may not be the wisest option. There are several area stores that sell second-hand sports equipment for children.
Consignment stores offer great buys on high quality, lightly used items. Careful comparison shopping will allow you to get good prices for items you buy new. If you start to develop a habit of spending wisely, you will not only be able to control costs throughout your child’s life, but also set an excellent example for him to follow.
Once you have a child and get through the first year, it’s time to start saving. “Put away at least 10 percent each month into a savings program,” suggests Eric Aafedt, president of MarketFN.com. A forced savings plan, where money is deducted directly from your paycheck and placed into a savings account or investment program is the best way to make sure you are meeting your savings goals. Savings must be a priority and should be like a bill you pay every month.
Creating a healthy savings account may seem impossible if you can’t shave much off your budget, but you can save more than you think. “As a child moves through life stages and their associated costs, don’t pocket the savings on diapers, daycare, formula, etc. Rather, accumulate the former weekly diaper money and place it away in a savings plan,” recommends Brice Harrington, director of 529 plans at MFS Investment Management.
Other ways to build savings include putting away money given to children as gifts, asking relatives to contribute to a child’s savings account or college account instead of buying gifts and saving money you receive as rebates or tax refunds. Even a small savings plan that allows you to save $10 or $20 a week can add up to more than $1000 a year.
Use Debt Wisely
Your family’s total debt-to-income ratio should remain at less than 20 percent, with 10 percent being optimal. While most people think that all debt is bad, in fact, “there is good debt and bad debt,” says Bob Waters, chief economist for Quicken Loans. Good debt is debt that gets your family something, like a home or a car. Bad debt is debt that continues to grow unchecked without providing you with anything of substance, like credit card debt. New families should use good debt to move ahead and avoid bad debt whenever possible.
Some new families find that they need to add an addition to make room for the baby. “A home equity loan (HELOC) is the best way to finance a home improvement project. With a HELOC, individuals have the flexibility to draw money as they need it, and the interest is only applied to the amount drawn, not the entire credit line,” says Waters. The interest is tax deductible as well, helping to make it a good debt. Just beware the hidden dangers. If you miss payments, you could risk losing your home.
Think About College and the Future
When thinking about the costs a child brings, most people immediately think of college as the largest and most difficult expense to meet. In fact, new or expectant parents should start saving for college now. The earlier you save, the longer the money can grow for you.
There are several methods to help you start saving for college. “The 529 college savings plan allows the most money to be socked away with significant tax benefits, yet parents still control the money,” says Mary Staton.
Planning for the Future
College is not the only big expense new families need to think about and plan for. “As important as college is, there are a few things parents need to do first for the family before they save for college,” says Ramsey. “Save $1,000 fast for small emergencies. Pay off all your debts except for the house, smallest to largest. Save three to six months of expenses for life’s big emergencies. Then, maximize your retirement investing,” says Ramsey. College is an important thing to plan for, but you shouldn’t neglect other things to pay for it.
While saving for college and the future are important moves, Michael Sullivan, director of education at Take Charge America believes that there are important things to spend money on while your child is young. “It is not wise to skimp on preschool education or life enrichment activities such as travel just to save for college. The younger years will have more impact than the years from 18 to 22.”
Brette Sember is a retired attorney and author of Your Practical Pregnancy Planner: Everything You Need to Know About the Financial and Legal Aspects of Preparing for Your New Baby (McGraw-Hill, 2005), How to Parent With Your Ex: Working Together in Your Child’s Best Interest (Sourcebooks, 2005) and Your Plus-Size Pregnancy: The Ultimate Guide for the Full-Figured Expectant Mom (Barricade Books, 2005).
Do the Math … Online
It’s important to stay on top of your financial situation. If you’ve got a new baby on the way, here are some Web sites that can help you get a clear snapshot of what to expect.
Calculate what how much it will cost to raise your baby using this online calculator.
Make a “quickie budget” or use any of Dave’s other planning printables.
Find out more about saving for college.
Learn more about debt-to-income ratio.