Raising a child isn't cheap. The price tag (in today's dollars) for a baby born in 2015: about $233,610 from birth through age 17 for a middle-income family, and about $372,210 for a family in the highest income bracket,1 says the US Department of Agriculture (USDA). And guess what? That doesn't include college. For a 4-year public school, you'd need to add $83,080 (in today's dollars) to the total bill—$187,800 for a private school, according to the College Board.2
"In the excitement of parenthood, it's hard to focus on how that little bundle of joy will affect your bottom line," says Ann Dowd, CFP®, vice president at Fidelity, and mother of 3. "But a little planning early on can go a long way. 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."
There's a lot you can do to keep your finances on track as your children grow up. Here are 6 ways to help manage your money.
Prepare for new and unexpected expenses
Many new parents are surprised by the vast array of new expenses that come with children—and those expenses change and grow through each stage of childhood. Everything from day care to new clothes to French lessons and car insurance all cost a lot of money.
To cope with the inevitable unexpected bills, having 3 to 6 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 every month and put into a separate account, which you can tap quickly for emergencies.
Start saving for college from day 1
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. But how much is enough? As a rule of thumb, multiply your child's current age by 2,000. With each birthday, your child's age times 2,000 is the amount we suggest you need to have saved to make sure your college savings are on track.
There are a variety of ways to save for college, including UGMA/UTMA accounts, Coverdell Education Savings Accounts, and 529 plans.
A 529 college savings plan could help boost your savings with tax benefits. 529s 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. Additionally, some states offer tax benefits for contributing to their own state plan, or, in some cases, any 529 plan. Plus, you can contribute up to $15,000 a year to a 529 without incurring gift taxes, or $30,000 for a couple. There's also an option to fund a 529 account with a lump sum. The contribution is prorated over 5 years for gift tax purposes so an individual could potentially contribute up to $75,000 at one time—or $150,000 for a couple. So if you get a big bonus or a windfall, you might want to consider tucking some of it away for Junior's future.3
Don't have too much house
Your home is an emotional topic. It's also likely the largest item in your budget. And for the typical family, it's the largest child-rearing expense, according to the USDA. While you want a home that can accommodate a growing family, beware of over spending for the roof over your head—and the costs of maintaining it.
Fidelity's 50/15/5 rule of thumb suggests spending no more than 50% of your take-home pay on essential expenses—housing costs as well as food, health care, and debt repayment. Another way to think of it: Hold your housing costs to about 30% of your monthly income. The US Department of Housing and Urban Development considers families who pay more to be "cost burdened"; such families may have difficulty covering other important expenses.
Spend too much on housing and you may not be able to do all the other things you'd like to do, like paying for a child's education, taking vacations, or planning adequately for retirement.
Protect what you have
When you're single, spending money on insurance can sometimes seem unnecessary. But when someone else is depending on your income, there's generally a need for life insurance. Term life insurance, which you buy for a fixed period of time, may be something to consider. It's generally inexpensive and may provide some peace of mind.
It's also important to consider what would happen to your family if you couldn't work. Review your disability insurance at work, or consider purchasing it on your own if you are not covered through work—or aren't covered enough. This protection could be vital if anything prevents you from working and earning a paycheck for an extended period of time.
Get kids involved
Teaching kids the value of a dollar is always a good idea. The idea that everything costs money and that spending requires tough choices are worthwhile lessons to learn. But it takes time for their growing brains to understand concepts like delayed gratification and saving for a goal. Reinforcing the concept of trade-offs as they grow up may give kids a foundation that will serve them well later in life—and may help control costs when the expensive teenage years hit.
It is never too soon to start saving for retirement. Kids with income from a job or self-employment such as babysitting, mowing lawns, or shoveling snow can contribute as much as they earn to a Roth IRA for Kids—up to the $5,500 contribution limit.
Take advantage of benefits at work
If your kids are still little, you may be paying for day care. Consider contributing to a dependent care flexible spending account (FSA) if it's offered by your employer. Because you don't pay federal income taxes on that money, it's easier to save for child care costs like day care.
Health care costs can vary wildly—even with benefits from an employer. With frequent visits to the pediatrician and other family health care needs, choose the plan that your doctors take and that offers you flexibility at an affordable cost. Weigh a high deductible health plan (HDHP) with a health savings account (HSA) against HMO or PPO options. HSAs are triple tax-free: Contributions, earnings, and qualified withdrawals for medical expenses are free of federal income taxes.
Don't forget to save for retirement
It's natural to want to give your kids the world—but do provide for yourself as well. Saving for your retirement should also be a priority, along with providing a nice home, good education, and fun experiences for the kids. It can be a little tricky to balance all the things you want to do. But taking steps to build a strong retirement fund can help keep you financially healthy for life—and that's something that can benefit your entire family.
Fidelity recommends saving at least 15% of your pretax pay for retirement, including any match you may get from your employer. That's just a starting point; you may need to save more or less depending on the age at which you begin saving and other factors. If you can't swing that right away, don't fret, but try to ratchet up your savings over time. Time can help work in your favor—and your family's—if you can start early.
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 potential returns.
Next steps to consider
Open a flexible, tax-advantaged 529 college savings plan.
Confirm if you're on track with our college savings calculator.
Learn how to plan for future college education expenses.