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Budgeting for a baby

Early planning for significant costs, like a new baby, is a smart financial move.

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If you are like many new parents, taking care of a newborn can be an exhilarating but sometimes overwhelming experience. A bigger shock, however, may be realizing how much money it can take to bring up a child.

Although nobody likes to think about attaching a price tag to a baby, parenting involves preparing for the future. According to their 2011 Expenditures on Children by Families report, the U.S. Department of Agriculture says it could cost a middle-income family about $234,900 to raise a child from birth through age 17, and about $389,670 for a family in the highest income bracket.1 Beware: This total does not include paying for college.

These can be daunting numbers. Rather than suffer from sticker shock, however, you can use this information to your advantage. Child-rearing expenses grow over time, and being armed with a sense of how much it might cost can help you manage your bills.

“New or expectant parents can’t really imagine how much a baby could impact their bottom line,” says Ann Dowd, CFP®, vice president at Fidelity Investments. “However, you can start tracking what you’re spending each month on everything from formula and baby food to housing and medical expenses. Understanding your cash flow, from the time you start your family, is critical to your ability to meet the growing expenses of raising children.”

Take a closer look at costs

To start, you should recognize that many factors may impact how much you’ll likely spend to raise your children. They include how many children you have, how much money you earn, what type of health care coverage is available, and even where you live.

First, let’s take that daunting $234,900 figure and break it down into a more palatable annual expense. For the average middle-income, two-child, two-parent family in the U.S., this means about $16,660 to $18,080 in annual expenses for the younger child.

Next, you need to consider your financial situation. What types of child-rearing expenses should you consider? The USDA categorizes them into housing, food, transportation, clothing, health care, child care/education, and miscellaneous expenses (see chart below). As you can see, housing is by far the biggest expense.

For a middle-income family with two children and two parents, housing actually accounted for about 30% of the total spent to raise a child, according to the USDA. The next biggest expenses were child care/education (18%), food (16%), and transportation (14%).

Of course, these are just averages. Much of what you will incur depends on your family circumstances. One major point to note is that the USDA expects child-rearing expenses to continue to increase over time.

You might be asking: What about college tuition and fees? According to the College Board in 2010, college expenses have increased an average of 5.6% per year over the past decade. That is beyond the rate of general inflation. For the 2012-2013 college tuition year, the average total cost per year for a four-year public school (in-state) was $17,860 (including tuition, fees, room, and board). For a four-year private school, the average total was $39,518. 2

Put a plan together

Although you can’t plan for every child-related expense you’ll encounter, you can do a lot to keep your family finances on track as your children grow up. Here is a five-step plan to get started:

1. Anticipate new costs
For example, you may find as your family grows, your housing needs change. To buy a bigger house, you’ve got to make room in your budget for higher mortgage payments and that might mean potentially cutting out some discretionary expenses.

Or, perhaps one spouse wants to stay home to raise the children. If both spouses plan to work, you may need to put your child into day care at some point. In all cases, these are expenses you can anticipate. “Knowing what is coming down the pipeline is an opportunity to plan and one that allows you to look for wiggle room in your budget now in order to save for future needs,” Dowd says.

2. Plan for emergencies
Having emergency cash reserves—three to six months' worth of expenses—is an especially good idea when you have a family. One of the best ways to build a nest egg is to have a certain amount of money automatically taken from your checking account each week or month and stash it away for safekeeping. To help you manage your everyday spending and short-term investing, learn more about the mySmart Cash Account® from Fidelity . This is a brokerage account for your everyday spending and short-term investing needs with all the benefits of traditional checking.

3. Make your home work for you
Housing is the largest child-rearing expense for the average family, according to the USDA, but there are ways to manage the cost. It’s important that your home accommodates a growing family, but don’t buy more house than you need. Make sure your mortgage is commensurate with your salary and other monthly bills.

“Housing costs go far beyond a mortgage,” says Dowd, “and many people don’t factor real estate taxes, utilities, or home repair costs into the equation. This is a mistake that can push you beyond the boundaries of your housing budget.” As a general rule of thumb, your mortgage payments, property taxes and homeowner's insurance should not exceed 28 percent of your gross income.3

Also, you may want to think carefully about your location. The USDA report says that child-rearing expenses were highest for families living in the urban Northeast, followed by the urban West and urban Midwest. Families living in the urban South and rural areas had the lowest expenses. These cost differences are most likely due to variations in housing and child care/education costs.

4. Purchase protection
Any time you have loved ones depending on your income, you may want to consider life insurance to protect them.

“If there is a need like this, don’t wait to fill it,” says Tom Ewanich, a Fidelity vice president and actuary. “The amount of life insurance you need to protect your family depends on your current salary—and what expenses you want to cover. Remember that the younger and healthier you are, the less expensive your life insurance will be.”

To estimate your own life insurance needs, try our Term Insurance Needs Estimator. It may also be a good idea to review your disability insurance through your workplace plan, or consider purchasing this insurance on your own if you are not covered through work. This protection could be vital if an unexpected event prevents you from working and earning a paycheck for an extended period of time.

5. Save smarter for college
Although not covered in this USDA study, college is a growing expense for many families. Make time your ally when saving for college. If you start soon after your child is born, even saving small amounts each month could help you build a sizable college fund over 18 years. Estimating how much college will cost is a critical step in a plan. Consider saving through a 529 college savings plan for a potential tax advantage. “529 college savings plans offer a real value because both earnings and withdrawals made for tuition and fees, room and board, and other qualified expenses are free from federal income tax,” says Dowd.

Plan ahead

When you consider having a baby, your budget may not be the first thing you think of. But planning for the future is one of the greatest gifts you can give your baby. Kids are a big investment, but the returns are immeasurable.

Learn more

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1. USDA Expenditures on Children by Families 2011. Retrieved from: http://www.cnpp.usda.gov/expendituresonchildrenbyfamilies.htm
2. The College Board
3. Bankrate
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