Your home is not the biggest investment you’ll ever make—your kids are. You probably won’t use cost as a determining factor in whether you decide to raise a family, but you can still benefit financially from some advance planning.
The most immediate financial issue when you and your partner are thinking of giving birth to a new member of your family is how much of the associated cost will be covered by your health insurance. Estimate how much you can expect to pay out of your own pocket, based on the coverage provided by your health insurance policy. If you’re covered under an HMO, you’ll probably have a co-pay for each doctor visit (usually $10 to $25) and a co-pay for the hospital admission for the delivery (usually a minimum of $250 to $500). Even if you make sure that your doctor and the hospital you plan to deliver in are in your HMO network, other professionals (such as an anesthesiologist) might not be, which could leave you facing some very large, unexpected medical bills.
Cost of Raising a Child
The US Department of Agriculture estimates that the average total cost of raising one child from birth to age eighteen runs to $233,610. That number doesn’t even include any provision for college costs.
If you have a high-deductible plan instead of an HMO, you probably have to pay out somewhere between $1,500 and $8,000 before the insurance kicks in. After the deductible, your plan may pay 80 percent of all other allowed charges, and you’ll pay 20 percent, up to a maximum out-of-pocket expense. These factors can vary, so make sure you fully understand your health insurance policy.
Find out how much it will cost to add your new family member to your group medical insurance policy as a dependent. If you and your spouse have separate insurance policies, figure out if it makes sense for one of you to transfer to the other’s policy. Dependent coverage may be cheaper if you’re all on one policy, especially if one spouse has employer-sponsored health insurance. If you or your spouse has the option of contributing to a Flexible Spending Account (FSA) or Health Savings Account (HSA, available with high-deductible health plans) at work, take advantage of that as soon as possible. Remember, money in an HSA stays with you until you use it, while FSA balances disappear every year (use it or lose it).
Think about how you’ll manage on one income during maternity leave and possibly reduced income during the pregnancy. Are you covered by short-term disability insurance? If so, you’ll receive between 50 percent and 100 percent of your regular income (depending on your specific coverage) for approximately six weeks following delivery (eight weeks if you deliver by C-section), or sooner if you’re deemed medically unable to work during your pregnancy. Arrange childcare well in advance. It takes time to interview potential providers and check them out with other parents who have used them. Childcare is a huge expense, so figure the costs into your budget ahead of time and come up with ways to make cuts elsewhere if necessary. Childcare expenses are eligible for a tax credit as long as you provide the caretaker’s employer ID or Social Security number to the IRS. If your employer offers a Dependent Care FSA (similar to a healthcare FSA but for childcare expenses), consider funding that to pay for at least some of your childcare costs with pretax dollars.
Start a baby fund to cover unexpected costs, and contribute to it monthly. Shop for bargains on baby clothes, equipment, and supplies, but don’t skimp on items that affect safety, such as high-quality car seats. Babies don’t care what they’re wearing or what their blanket looks like, so avoid the temptation to buy every adorable thing you see (yes, it’s hard).
Before you jump to the conclusion that you can’t afford to live on one salary so you or your spouse can stay home and raise your kids, consider the cost of working:
Estimate all of these costs, add them up, and deduct the total from your net pay (after taxes). This is how much the second income is contributing to your household budget.
For an example: Assume you bring home $400 a week. Childcare costs average around $200 per week, and those costs have been growing every year. That’s already half of your take-home pay! Now subtract an estimate of all your other work-related expenses as previously listed. That’s what you’re really getting out of that second income. If you don’t want to deal with all this math, check out articles and tips at www.parents.com.
You may find your paycheck won’t stretch as far as you expected. If you can’t make ends meet without the extra money, try going back to your budget and see where you can make cuts. You can find a lot of resources online offering tips and tricks for how to make ends meet while staying home with your kids. For effective cost-cutting strategies, visit websites like The Penny Hoarder and The Balance.
Most people end up in financial trouble by the time they’re in their early twenties. That’s largely due to a lack of personal financial education. You can start teaching your kids important financial concepts at very young ages. By making them comfortable and confident with money, you’ll be helping raise financially savvy and secure adults.
One of the first—and most important—lessons involves opportunity cost, the concept that if you spend money on X, you won’t have that money for Y. Other important lessons include delayed gratification (not getting what they want the second they want it), save first–buy later, and earning money (it doesn’t magically appear). You can find helpful resources on websites like www.incharge.org and www.consumerfinance.gov (look for the Money As You Grow tab under Consumer Tools).
Kids should start receiving a “paycheck” by the time they’re able to do simple chores (at around preschool age). This teaches them at a very young age how to start managing money. Encourage them to save part of their paycheck (piggy banks and clear coin jars are great for this) so they can buy something they want. You can keep a stash of prizes in the house that they can buy once they’ve earned and saved enough. As your kids get older, adapt your teaching to their age and ability to understand. For example, you can teach older kids about budgeting, borrowing and credit, and investing by using online tools and games. Excellent resources include Moneytopia and CashCrunch games.
One of the most important things you can teach your kids is that advertising can influence their buying decisions. They can resist giving in to the advertiser’s message that buying a particular product makes kids look cool or makes them feel good. Having the absolute latest in electronic gadgets, for example, isn’t always necessary.