Based on the most recent data compiled by the U.S. Department of Agriculture, parents who had a child in 2013 can expect to spend about $245,000 in child-related expenses by the time their kid turns 18. That age is a critical factor, as the estimate doesn’t include college. That number may seem daunting to a young parent, but if you are expecting a newborn this year, there are a few key financial steps you can take to ensure your little one will have a bright future.
Set Up a Budget
It might seem elementary, but experts suggest tweaking your budget to address newborn finances. Two of the many possible ways to do this are: 1) Estimate expenses before the baby arrives, and adjust your budget accordingly; or 2) Wait until you’re actually tucking your baby in at night, so you can track new infant-related expenditures as they occur and know for sure what they will cost you.
Regardless of your approach for creating a family budget, the important thing is that you identify what income you have to work with and what you’ll spend, including all regular monthly expenses. CNBC advises that you might have to forego or reduce long-term savings (such as for retirement) if you find that you’re putting baby-associated expenses on a credit card to make ends meet.
Plan for Child Care
Unless one parent stays home with the baby, child care costs will probably be one of your greatest new expenses. According to a 2015 study by the Economic Policy Institute, families with two children can expect to pay more for child care than they do for rent.
So what’s a family to do? Forbes suggests looking into a dependent care account if both parents are employed or attending school. You can fund it with pre-tax dollars, then use it to pay for qualified child care expenses, earning yourself a tax break for money you’d have to spend anyway. Speak with a tax professional to determine what’s best for your family.
Update Your Insurance Coverage
You won’t have much time to tweak your health insurance coverage to include your baby after he/she arrives. Most plans require that you add newborns to your policy within 30 days of birth. Otherwise, you’ll have to wait for the next open enrollment period, which could cause undue stress if you encounter unexpected medical bills.
Don’t forget life insurance. Your little one depends on you, so you’ll need to have a backup plan (or plans) in case an unforeseen circumstance affects your income. CNBC suggests coverage of 10 times your annual income. Even stay-at-home parents should have life insurance coverage, because losing that parent to an untimely death would mean additional child care costs.
Plan Your Estate
In the event that you can no longer care for your child (due to injury or death, for example), consider an estate plan. You can name a guardian in a will, taking the decision out of the hands of the court. Without a document that names a guardian ahead of time, a judge will make the decision for you.
But choosing an adult to care for your child is just the first step. Presumably your child will inherit from you financially as well, and minors cannot legally handle their own finances. You can set up a trust, and appoint a trustee to manage your child’s inheritance for until he/she comes of age — trusts are practical estate-planning tools that aren’t just for the very wealthy. Talk to an attorney to explore your best options.