Babies and Budgets

In this topic, you'll learn:

• The costs involved in bringing a child into your life.
• How to create a budget and track your expenses prior to having a baby.
• Why you should review your current debt situation and how you should plan to reduce your debt.

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According to some estimates, the average middle-income couple spends over $13,000 on baby-related expenses during the first year of a child's life. Over the first 18 years of a child’s life, the average couple will spend nearly $300,000 - and those are just the major expenses like housing, transportation, health care, food, clothes, and childcare. Interested in luxuries like piano lessons or a college degree? Those are not included. Considering reducing hours at work to spend more time at home? That missed income is not included either.

When planning for all the new expenses of having a baby, the first step is to take a close look at your family's current financial situation. Expenses are likely to only increase after a baby arrives and many families also experience a decrease in earnings while caring for a newborn, so there's no better time to get your financial life in order than before having a child.

Here are some common-sense steps to consider before bringing a baby on board.

Review Your Monthly Budget
If you don't have a written monthly budget or one that's up to date, create one now. Our Monthly Budget Calculator will help you create a spending plan that includes everything we tend to forget about or underestimate - from how much we spend on dinners out to how much we should spend to pay off an old credit card debt.

Once you've created a realistic budget, you'll get a sense of your monthly cash flow - how much money remains (or is lost) each month after subtracting your expenses from your income.

Track Actual Spending
A budget is just a plan - it does not reflect your actual spending. You’ll need a reality check by tracking your spending for at least a couple of months. Use our Budget Tracking tool to track every dollar spent on a daily or weekly basis. Just tracking your spending for a month or two can be helpful in spotting opportunities for saving. People rarely track actual spending without finding a few surprises along the way. Regardless of what you find, you'll be in a better position to spot inaccurate projections in your budget and to find new ways for saving.

Pay Down or Eliminate Revolving Debt
Credit cards, credit lines, store credit cards, and payday loans are all considered high-interest debt, meaning the payments (and interest charges) will continue for as long as it takes for you to repay the debt, and with interest rates from 15% to 30% or more, these debts can be incredibly destructive to your financial life. They take money you could be saving through high interest rates, and the penalties for missing a payment can be severe - often leading to even higher interest rates.

If you have revolving debt, it's a great idea to pay off as much as possible before your baby arrives. Work extra hours, take on additional projects or a seasonal job - whatever it takes. Paying off excess debt will only get more difficult as a new parent.

Audit Your Debt
In addition to revolving debt, many families have debts that are structured over years or even decades. Mortgages, student loans, small business loans, and even car payments are all examples of longer-term debt. It's not always possible to refinance these loans, but it's worth inquiring about any opportunities for reducing your interest rates.

If you have federal student loans, make sure you understand all of your options for restructuring the term of repayment. If money is very tight, you can lower monthly payments by moving to a repayment plan that's longer than 10 years - just remember that your overall costs will be higher. If your family has a low income, there may be other options to reduce or to temporarily suspend payments. Finally, there are loan forgiveness programs for those working in certain fields.

When focusing on debt reduction, remember to always pay the debts with the highest interest rates first.

Create an Emergency Fund
An emergency fund is a good idea for anyone, but the arrival of a new child makes a stable financial outlook even more important. At some point, almost everyone experiences the loss of a job, an expensive car repair, or an unexpected dental bill. Without an emergency fund, any of these events could result in a significant debt burden - most likely financed by a high interest credit card. If your family's budget is tight, a new bill could bring financial stress or worse.

If possible, save at least three to six months of expenses for emergencies. Keeping the money in a dedicated emergency savings account can also be a good strategy - it reduces the temptation to spend the money on routine purchases and some banks or credit unions also offer fee reductions or waivers if a certain amount of cash is kept in savings.

Please note that we outline how to protect against major financial risks with insurance and legal agreements in another section.

How do you know when you're absolutely ready to add a baby to your budget? Having an extra $1,000 to $1,500 is a good start - that money should cover basic baby expenses as well as some daycare. But the financial situations and support systems of families vary to such a degree that it's almost impossible to say - some may need more while others need less.

The reality for many families is that they are not completely ready for the financial responsibilities of a new baby when one arrives. They don't always understand the costs associated with raising a child, they spend more than expected, they start with a debt burden that leaves little room for extra expenses, or they find that the timing of their child was not exactly what they expected. These are not unusual situations, as just about any parent will tell you.

The good news is that many baby expenses are flexible - second-hand baby clothes, cribs, and other essentials are often available for little or no money. Many parents also find a baby to be a powerful motivating factor to increase earnings through earning a promotion, starting a higher-paying job, or even continuing their education. There are no guarantees, but financial situations can improve over time - even with the added responsibility of a baby. Finally, in a worst-case scenario, there are government and charity programs that can help with baby expenses, including food and health care.