Financial Planning When You’re Expecting a Baby

financial planning

Along with all of the big emotions that accompany a positive pregnancy test comes the stressful question: How will I be able to afford this? No matter if the pregnancy was planned or a total surprise, many parents find themselves balking at the impending massive expenses associated with supporting a child. Diapers, formula, clothing, baby food, nursery furniture, baby gear, toys, books, activities, day care, doctors’ visits, education—these expenses and many more will need to fit into your budget over the course of the next 18+ years. Without a doubt, it can feel overwhelming to financially prepare for an expanding family. Here are a few steps to help you ready your finances for parenthood.

First things first: relax!

Take a deep breath and focus on one thing at a time. If you have just found out that you or your significant other is expecting, you likely have at least seven to nine months to get things situated.

Evaluate your current money situation.

The first actionable step is to determine your spending “before kids.” The best way to do this is to take a very hard look at the first month after you find out that you’re expecting. In order to successfully track your “pre-baby” finances, spend like you normally would, but keep a diligent record of every penny spent. At the end of the month, you will be able to see your expenses, your income, and how much money you have left over. Take notes throughout the course of the month regarding any expense categories in which you may be able to cut back.

Estimate your baby’s first year expenses.

Once you have a good idea what your current monthly spending looks like, ask friends and family who have recently had a baby how much they spent preparing for baby and how much they spend monthly now that their baby has arrived. In a 2010 study completed by the USDA, they found that new parents spent an average of $12,000 on child-related expenses in the baby’s first year of life. This number (quite easily, in fact) breaks down to about $1,000 a month.

Keep in mind that expenses will be slightly different for each family due to variables like the cost of bottles and formula vs breastfeeding and the cost of childcare vs stay-at-home parenting. To get a breakdown of your first year expenses, you can use Baby Center’s First-Year Baby Costs Calculator. There are also expenses for things you don’t think about at first, like keeping your house warmer—and paying a higher heating bill—to accommodate a sensitive newborn. Your financial plan for your new baby isn’t meant to be exact; rather, it will give you an estimated idea of how much you can expect to spend.

Based on your above estimate, make a plan for your baby’s first year of life.

Now you have some decisions to make. No doubt you will realize that you are currently spending money on things that need to be cut or eliminated to make room for new expenses related to having a baby. But some of these decisions are bigger, and more emotional, than simply eating out less frequently or cutting entertainment costs.

For couples living on two incomes, deciding whether or not one spouse will stay home to care for the child can be an emotional as well as financial decision. Some parents may wish to stay home while their child is young but find that they will have trouble making ends meet on one income. Other parents may thrive on the sense of self they derive from their work life while simultaneously struggling with leaving their child in day care. Start planning for these challenging choices now so you aren’t burdened with them after the baby’s arrival – when emotions are high and you’re living on little sleep.

Look beyond the first year.

Beyond everyday expenses, there are a lot of longer range expenses to think about when you have a child. Believe it or not, as expensive as newborns are, kids actually tend to get more expensive as they age. And while new parents can find themselves already starting to worry about college expenses, the best thing you can do for long-range planning is to protect your family financially. This means getting life insurance and establishing a will or estate plan in the event of your untimely departure. Once those important decisions are made, you can begin saving for college and other future expenses. The sooner you start, the better your future position will be to help your child achieve their dreams.

Bringing a new life into the world is an overwhelming, emotional experience. The good news is there are steps you can take now to make it financially manageable. Understand your expenses, set a budget, and stick to it. Now is the perfect time to take the necessary steps to set your family up for financial success.

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