Your little bundle of joy is going to require a wad of cash.
The cost of raising a child from birth to age 17 has surged 25 percent over the last 10 years, due largely to the rising cost of groceries and medical care, according to theDepartment of Agriculture, which tracks annual expenditures on children by families.
The government’s most recent annual report reveals a middle-income family with a child born in 2010 can expect to spend roughly $227,000 for food, shelter and other expenses necessary to raise that child — $287,000 when you factor in projected inflation.
And, no, the bill does not include the cost of college or anything related to the pregnancy and delivery.
“If you sat down to tally up the total cost of having children, you’d never have them,” says Timothy Knotts, a father of four and a certified financial planner with The Hogan-Knotts Financial Group in Red Bank N.J. “It’s a very expensive adventure.”
Talk about a life-changing event. That's a lot of vacations, clothing, and restaurant dinners you may no longer enjoy.
Ultimately, of course, the decision on whether or not to expand your family has little to do with dollar signs.
For most prospective parents, kids are the central priority around which all other lifestyle decisions get made — career moves, housing choices, where to live.
Because of its financial impact, however, it’s wise to begin planning for parenthood as early as possible, says Matthew Saneholtz, a certified financial adviser with Tobias Financial Advisors in Plantation, Fla.
“You don’t want to get too hung up on whether you’re ready financially, because no one is ever really ready and it works out in the end, but you do want to think about how you see that first year with a new baby,” he says.
Among the first issues you'll want to address:
- Will you both return to work or will one of you quit to care for the child?
- Does your employer offer maternity or paternity benefits?
- Are you going to need a bigger car?
- How much will your health insurance premiums climb after baby makes three?
You won’t necessarily have control over the process, but you should also discuss how many children you’d like to have and when you’d like to have them, as that affects the timeline for getting your financial house in order.
Ideally, says Saneholtz, you should pay off your credit cards and put retirement savings on autopilot before you welcome a baby.
The four-bedroom house with a fully equipped nursery can wait.
Couples should resist the urge to splurge on a house at the top of their dual-income budget, says Knotts, since you may change your mind about whether or not to return to the office after the baby arrives.
“Our advice to clients is any time there’s a life changing event, be it a baby or your own retirement, don’t make any huge changes,” he says. “Take your time. Do you want to be in a different school district, or closer to relatives or work? There’s a lot to think about.”
Prudent parents-to-be should also practice living on less before the big day arrives, says Chuck Donalies, a certified financial planner with Investment Planning Associates in Rockville, Md.
“Review all your expenses and cut out what you can,” he says. “Almost every household budget has some fat in it.”
Keep in mind that your annual medical expenses will almost certainly rise after you bring your newborn home.
Mark Lino, a USDA economist, notes that healthcare costs for the average family have increased 58 percent over the last decade, faster than any other expense component in the survey.
“With kids in particular, you’re going to have emergencies, and while you might go without for yourself, you’re going to take your kids to the doctor when they have a fever,” says Knotts. “Someone’s going to break an arm or knock out a tooth, and that could cost you a few hundred or thousand dollars each time.”
As a starting point, Knotts suggests living on 90 percent of your after-tax income, using the money you save to fund an emergency account worth three to six months of living expenses.
If one of you plans to quit work to care for the child, your new spending plan should reflect the projected loss of income.
You can also apply those dollars toward a life insurance policy after the baby comes along, says Donalies, providing protection for your little one (and your spouse) in the event something happens to the breadwinner.
Donalies recommends a term life policy that covers your family until well after your child is out of college.
“The cost of a term life policy is so low that you should have a policy until your child reaches age 30,” he says.
Ka-ching: Child Care
If you both plan to continue working, and you don’t have family willing to provide free labor, you’ll have to factor child care costs into your budget.
Such costs vary by region, as does the type of care provided, but the average annual price tag for full-time care in 2010 for an infant in a child care center ranged from $4,650 in Mississippi to $18,200 in the District of Columbia, the National Association of Child Care Resource & Referral Agenciesreports.
The average annual cost for full-time care of a 4-year old drops to $3,900 in Mississippi to $14,050 in the District of Columbia.
Nannies are more expensive still.
According to the International Nanny Association, nannies who live outside your home can cost more than $3,000 per month for full-time care, and as an employer you’ll be required to pay their Social Security taxes.
Ka-ching: College Tuition
There’s no rule that says you have to help your child with college expenses, of course, but if you plan to do so, you’d better start budgeting for that as well.
The average cost of a four-year college for in-state residents, including tuition, fees, room and board, climbed 6 percent for the 2011 and 2012 academic year, averaging $17,131, the College Board reports.
A public four-year school for out-of-state students cost an average $29,657 this year, while four-year private colleges cost more than $38,000 per year.
Knotts cautions parents, however, to save for retirement first before throwing money into a tax-advantaged 529 college savings plan. After all, there are no scholarships or loans for retirement.
Manage Money and Expectations
Finally, remember that it’s ultimately you who decides how much you’re willing to spend on your kids.
Families with higher incomes, for example, tend to spend more on discretionary expenses like Apple iPods and Decker Outdoor's Uggs– things your child may want, but doesn’t need.
The USDA report shows that a family earning less than $57,600 per year can expect to spend a total of $163,440 on a child from birth through high school; parents with an income between $57,600 and $99,730 can expect to spend $226,920; and families earning more than $99,730 can expect to drop $377,040.
“Kids don’t have to have all this stuff,” says Knotts. “We are a generation where we feel like we need to give our kids all of these experiences, but you can do a lot with your kids without spending a lot of money.”
Children may be a blessing, but they don’t come cheap. Families that plan ahead not only have better control over their budgets, but are often able to do more with less. They're also better positioned to ensure their own financial goals don’t get derailed along the way.