So how much will it cost?
Becoming a parent tends to change one's life perspective drastically. New parents suddenly see the world through a different set of eyes – those of their newborn child. A new parent's focus and priorities immediately shift from "me," or perhaps "me and my spouse," to "my son or daughter."
Of course, becoming a parent brings additional responsibility, including that of providing materially for your new child. This isn't a responsibility to be taken lightly: It's now estimated that the average American family will spend somewhere between $11,000 and $23,000 per year raising a child through the age of 17, or a total of between $187,000 and $391,000. Also, don't forget to tack on another $7,100 for prenatal and childbirth costs.*
With numbers like these, it's not surprising that the size of the average American family has been steadily shrinking and is now down to 3.1 people.** In other words, the average family today has just one child. While there are many factors that go into the decision by many couples to have fewer children (or no children at all), the financial costs incurred in raising a child are no doubt one of the main ones.
However, there are steps you can take to be better prepared for the financial impact of having a child. The key is to begin your post-child financial planning and preparation as soon as possible.
Many new parents fail to plan financially for their new child until the day they arrive home from the hospital, if at all. As a result, they sometimes end up suffering financial harm – for example, by racking up huge credit card bills to pay for new and unanticipated child-related expenses.
It's important to take steps now to help ensure that what should be one of the happiest and most fulfilling experiences of your life doesn't become one that impacts your family finances negatively for years to come.
Creating a Financial Plan
Neglecting the financial aspects of having a child can prove to be extremely costly. Therefore, consider the following six steps to help you plan ahead and be better prepared for the financial side of bringing your new baby home:
- Take stock of your current financial situation. The first step in drafting a new financial plan for after your child is born is analyzing where you currently stand financially. To find out, create a simple family balance sheet. On one side, list all of your current assets, and on the other side, all of your current liabilities.
One of the best things you can do to help lessen the financial impact of having a child is to reduce your debt as much, and as quickly, as possible.
- Carefully reexamine your health insurance. The maternity coverage provided by health insurance policies varies widely, from none at all to comprehensive coverage and low co-pays after your deductible has been met. Even with good health insurance, you will likely incur some out-of-pocket expenses related to the pregnancy and delivery, so you'll want to know approximately what these are so you can plan ahead for them.
After your baby is born, he or she can probably be added to your existing health insurance policy as your dependent. Be sure to let your employer (if you have employer provided health insurance benefits) or your insurer know about this well before your child is born so all the paperwork and other details can be completed in a timely manner.
- Reassess your life and disability insurance needs. The primary purpose of life and disability insurance is to provide income to your family in the event of your or your spouse's untimely death or disability. With the arrival of a new baby, the amount of income needed from a policy will likely increase drastically.
Exactly how much life and disability insurance do you need? The best way to answer this question is to ask yourself: "If my spouse or I die, or we're no longer physically able to provide income for our family, how much money will be required annually to meet our expenses without this income?" Then multiply this number by the number of years you want the policy to support your family.
- Establish or update your will and trusts. If you haven't yet drafted a will, don't put it off any longer. It's imperative that you make arrangements for the orderly distribution of your assets in the event of your untimely death, as well as for the care of your child should you and your spouse both unexpectedly die at the same time.
Similarly, now is a good time to consider the potential benefits of creating a trust for your child's future financial benefit. A trust is a legal entity that can hold title to property for the benefit of another person, such as your child. It can be used to provide future financial security for your child while you retain control of the assets until your child reaches an age when he or she is mature enough to manage them, him- or herself.
- Shift your spending, saving and investing priorities. The additional expenses associated with the arrival of a new child will probably necessitate some rearranging of your family's financial priorities.
If you haven't created a family budget yet, now is a great time to do so. Start by listing all of your current expenses and income, and then start making adjustments.
- Decide whether (and when) you'll return to work. This is both a financial and an emotional decision for most parents. Some parents feel strongly that one parent should stay at home with their child, while others feel comfortable with going back to work at some point after the child is born. Interestingly, more than half (58.5 percent) of children in married-couple households today have both parents in the labor force.*** Either decision will require advance financial planning. If you or your spouse does not go back to work, you'll obviously need to adjust your spending and saving to reflect the reduced income. If you and your spouse will both continue to work, first determine how long the mother will remain on maternity leave and budget accordingly. Then add child care costs into your regular monthly expenses.
The financial benefits of having a child
You'll hear a lot about the costs of having a child, but there are also a few financial benefits. These include a number of possible tax breaks,**** including:
- Exemption deduction. As your dependent, each child counts as an exemption and an automatic $3,900 deduction on your federal income tax return. For a taxpayer in the 28% bracket, that's a tax reduction of nearly $1,000.
- Child tax credit. In 2013, you may receive a $1,000 tax credit for each of up to two children, depending on your income level. Unlike deductions, credits reduce the amount of tax you owe dollar-for- dollar.
- Child care tax credit. Uncle Sam will also cover part of the cost of your child care (if you and your spouse meet certain conditions). In 2013, you can receive up to a 35 percent tax credit on your first $3,000 in child care expenses per child, which would total $840 for a couple in the 28% tax bracket.
Combined, these three tax breaks would save this couple a total of more than $2,800 in taxes a year for one child.
In addition, many couples find that a child forces them to become more disciplined in their finances than they were before the baby came along. They keep closer tabs on their spending, shop more carefully, eat out and entertain less frequently, and spend less money on what they now consider "frivolous" items than they did before. And when they do splurge for a sitter and a night out, it usually seems so much more special!
* Source: U.S. Department of Agriculture
** Source: U.S. Census Bureau
*** Source: U.S. Dept. of Labor, 2012
**** Based on current tax law, subject to change. You should consult your personal tax and/or legal advisor concerning your individual situation.