Raising a child isn’t cheap. The price tag (in today’s dollars): about $241,080 to raise a child from birth through age 17 for a middle-income family, and about $399,780 for a family in the highest income bracket,1 says the U.S. Department of Agriculture (USDA). And guess what? That doesn’t even include college.
“Parents can’t imagine how much a baby could affect their bottom line,” says Ann Dowd, CFP®, vice president at Fidelity. “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—and save for your future too.”
Of course, these are just averages. Much of what you will incur depends on your family circumstances. And then there’s college, which has steadily increased in cost every year. For 2012–2013, 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, according to the College Board.
There's a lot you can do to keep your finances on track as your children grow up. Here is a five-step plan to get started.
1. Expect and prepare for new expenses.
You may find that as your family grows, for example, you need a bigger house, which usually means a higher mortgage. That might mean cutting out some expenses that aren’t necessities. Or, perhaps one of you wants to leave work to raise the children. If you both want to work, there’s day care to consider. “Knowing what is ahead allows you to look for wiggle room in your budget so you can save for future needs,” Dowd says.
2. Have an emergency fund.
Having three to six months' worth of expenses on hand is an especially good idea when you have a family. An easy way to create an emergency fund is to have money automatically taken from your checking account each week or month and put into a separate account just for emergencies.
3. Don't have too much house.
Housing is the largest child-rearing expense for the typical family, according to the USDA. While it’s important that your home can accommodate a growing family, don’t buy more house than you need. Make sure your mortgage is in line with your salary and other monthly bills. See how one couple chose not to have a McMansion.
“Many people don’t consider real estate taxes, utilities, or home repair costs when buying a house. And those things can add up," says Dowd.
Think carefully about your location. Raising a family costs more in the urban Northeast, followed by the urban West and urban Midwest.
Families living in the urban South and rural areas in general had the lowest expenses, most likely because of housing and child care/education costs, according to the USDA.
4. Protect what you have.
"When someone else is depending on your income, there’s generally a need for life insurance,” says Tom Ewanich, a Fidelity vice president and actuary. “Typically, the younger and healthier you are, the less expensive your life insurance will be." To protect your family, consider term life insurance.
Also review your disability insurance through your workplace, or consider purchasing it on your own if you are not covered through work. This protection could be vital if anything prevents you from working and earning a paycheck for an extended period of time. Read Viewpoints: “Insure your paycheck.”
5. Save smartly for college.
Put time on your side for college costs. 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. 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, plan, plan
Your finances may not be the first thing you think of when having a family. But planning for the future is one of the greatest gifts you can give your children. Kids are a big investment, but so are the returns.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917