Having your first child is a welcomed milestone for many parents, but the price tag of parenthood could be overwhelming for some.
Recent figures from the U.S. Department of Agriculture says it will cost more than $245,000 to raise a child until adulthood. This figure includes a lot of items, such as housing, that you'd be paying whether or not you have kids.
However, frugal parents often find ways to bring down child-rearing costs by breastfeeding, cloth diapering and saying "no" to many of the things society insists children should have.
Even with these cost-cutting strategies, there is no denying that kids are going to cost a chunk from your paycheck. What's more, they bring with them the possibility of unexpected costs: medical bills, class trips and classes or other interests.
Be sure you're ready to face the cost of a child.
Follow these seven tips to get your family on firm financial ground before welcoming that bundle of joy:
1. Decide if you and your partner are ready for kids
The first step in welcoming a baby into your life is to have a heart-to-heart discussion with the person who will be helping you raise this child. Being a parent is both an emotional and financial commitment, and both parents need to be on board with the decision.
Still, money experts say there is no reason to wait until your finances are perfect before having a child.
"You're really never, ever going to be perfectly ready to have kids because something always comes up," says Keith Klein, Certified Financial Planner and principal of Turning Pointe Wealth Management in Phoenix, Arizona.
2. Determine your life and financial priorities
Instead of waiting for the stars to align or your next big raise, a better strategy is for both parents to commit to having a child and agreeing to work within their current means to meet their family's needs.
To do that, parents need to discuss and agree on a set of financial priorities.
Questions to ask about parenting and finances
The following are some questions to ask during this discussion:
- Do we plan to enroll our child in a public or private school?
- Will we pay for a portion of his or her college education?
- Do we want to take annual vacations or buy a vacation home?
- Will one parent stay home? If not, who will provide child care?
- Is our current housing adequate or would we like to move?
Klein suggests future parents ask others what expenses they've encountered with their kids to round out their discussion and identify any items they may have missed.
3. Create a budget based on family goals
A solid household budget is a crucial part of being financially stable in preparation for children.
"Being on firm financial ground isn't necessarily about not being in debt," says Cory Schmelzer, Certified Financial Planner and founder of San Diego Wealth Management. "It comes down to a plan and a budget."
Schmelzer says discussing family priorities in advance of creating a budget is important since a couple's shared vision will shape how they plan to spend and save their money. Fixed expenses, such as housing costs, need to be prioritized. But, once those are covered, a couple can discuss how to pull money from their variable expenses and redirect that toward a family goal.
For instance, a couple may decide to eliminate cable or cancel a gym membership and put that money toward an education or vacation fund. Others may take a more extreme approach and decide to trade in their big house for a smaller one and therefore a less sizable mortgage loan in order to allow one parent to remain home.
4. Set aside an emergency fund
While you don't need to be out of debt to have kids, you should have an emergency savings account in the bank. Klein recommends single income households keep a fund large enough to pay for six months of expenses. However, dual income households can probably get by with a three-month emergency fund.
"Unexpected things happen all the time," Schmelzer says.
A fully funded emergency fund helps you survive a financial storm, whether that's the loss of a job or complications during the baby's delivery.
5. Review your insurance needs
Next, you need to review your insurance coverage, including life insurance.
For the immediate future, you should know how much your health insurance deductibles and co-pays will be for labor and delivery charges. This is the amount you'll have to cover out-of-pocket. Then, you need to add your child to your policy within 30 days of their birth or adoption to ensure they will be covered as well.
For the long-term, consider whether you have enough life insurance. Klein recommends 15-25 times your annual income. While that can be through either a whole life or term life policy, Klein notes term life will get you the most coverage for the least cost.
Beyond life insurance, parents should consider buying disability insurance.
"Not enough people understand what can happen if they can't earn an income," Klein says.
Disability coverage can bridge a financial gap in case one parent is no longer able to work.
6. Update beneficiaries and discuss guardianship during estate planning
The birth or adoption of a child is a great time to review beneficiary information on insurance policies, bank accounts and retirement funds. Parents should also talk about drawing up a will and who would get guardianship of their child if needed.
"People often forget that the guardians who get the kids don't have to be the people who manage the money," says Klein, reminding parents that they can have a third party oversee money left to their children.
7. Come up with a Plan B for financial setbacks
Finally, Klein says every couple should run through a "fire drill" of what happens in a worst case scenario.
"What happens if we burn through our emergency savings? What if you lose a job?" he says.
This exercise helps couples create a workable Plan B they can put into action in the event of a crisis. Rather than being forced to make difficult decisions during an emotional time, couples should already have already identified how they can lessen the impact of a serious financial setback.
Couples thinking about having a baby should know a child comes with more than the opportunity to post cute pictures to your Facebook timeline. It's also a serious financial commitment, but one that parents can meet head-on by following these seven simple steps.
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