If you have always dreamed of becoming a parent, you’ve probably already thought about the preparations you need to make to support a new addition to your family. And chances are, you already know that bringing a child into the world is expensive, especially in today’s day and age. There are a wide variety of financial steps new parents should take before deciding to grow their family — but first, it’s important to understand exactly what the potential costs entail.
The True Cost of Raising Kids
In a recent study, online insurance organization EverQuote estimated the price tag of running an average household, comprised of two parents and two children. The organization factored in costs for the standard living expenses that make up a family’s budget, including housing, food, transportation, insurance, childcare, vacations, toys and other common household items.
Here’s the breakdown: Housing — including the purchase or rental of a house, repairs, property taxes, utilities, furnishings and appliances — was the most expensive item on the list, at an estimated $449,300 over 20 years. Food came in second, with an estimated cost of $369,606, while personal federal, state and other taxes took third place, at an estimated cost of $315,240. These expenses were followed by automobile, homeowners, group health and other insurance policies at a total of $283,540. The other items on EverQuote’s list included:
- Entertainment (pets, toys, hobbies and vacations): $268,380
- Transportation (vehicle purchases, gasoline and vehicle maintenance): $207,440
- Childcare (after-school care, summer care, school supplies and musical instruments): $186,994
- Savings (a “rainy day” fund and college savings for each child): $102,596
- Clothing and personal care products: $78,400
- Holiday gift spending: $35,380
- Medicine and medical supplies: $22,286
With all of these expenses considered, the grand total to support a family of four over 20 years is a whopping $2,3129,162. Of course, this amount doesn’t cover savings for other important life events such as retirement. If the study’s hypothetical couple only saved the maximum 401(k) contribution of $19,000 per year, the cost would come to $760,000 over 20 years. If you factor in this amount, the total cost to raise a family increases to more than $3 million over the 20 years it takes to raise two children.
If you are a new or soon-to-be parent, that number may send your anxiety through the roof — so let’s back up for a moment. It’s possible to put your family on solid financial ground without feeling like you’re underwater; the key is to get your priorities straight. Here are five foundational steps all new parents should take today:
1. Set a Budget and Stick to It
Between diapers and pediatrician visits, expenses pile up quickly in parenthood. To keep up, you and your spouse must establish a realistic budget and follow it with discipline. Online apps like Mint.com and You Need a Budget are simple, yet invaluable resources for creating your budget and making belt-tightening a little bit easier. Use whichever system works best for you.
2. Build an Emergency Fund
The prospect of falling seriously ill or losing a job is scary for anyone — but when you have a spouse and children to support, it can be downright petrifying. Your best defense against an unexpected event is your cushion of emergency savings. The rule of thumb is to have enough liquid cash in the bank to cover at least six months’ worth of living expenses.
3. Take Advantage of Tax Breaks
Fortunately, the tax code has several provisions that can take some of the financial strain off of new parents. For instance, the Child Tax Credit can provide up to $2,000 of relief for each eligible child in your family. In addition, if you hire a nanny or caregiver to look after your child while you work, you may be eligible to leverage the Child and Dependent Care Credit, which allows you to claim up to 35% of care-related expenses on your tax return.
4. Insure Your Family Against the Unexpected
When you become a parent for the first time, mortality is likely the last thing on your mind — but it is better to be safe than sorry, especially if you are the breadwinner in your family. Consider taking out a life insurance policy that can financially protect your family in the face of the unexpected. For young parents, term coverage can be a more viable and affordable option as well.
It’s also a good idea to consider coverage that can protect your family in the event that you or your spouse suffer a debilitating injury that keeps you out of the workforce for an extended time period. Many companies carry disability insurance for situations like this, so be sure to sit down with your employer and review your options for coverage.
5. Establish a Will
One of the most important financial tasks you can check off your list is creating a will or living trust. The will is an estate planning document that allows you to designate a guardian for your children in case you or your spouse are unable to care for them. Consider enlisting the help of an estate planning attorney to guide you through the process.
If you are ready to start a family and need help preparing your financial house, we encourage you to connect with our team. We can help you navigate the transition and ensure you start parenthood on the right foot.
Stay Diversified, Stay Your Course!