Financial Planning for Parenthood

By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, [email protected]

Personal Financial Management program staff often counsel military families about the financial implications of lifestyle transitions. This includes the decision by service members and their spouse to start a family by either having children of their own or adopting. As a television advertisement years ago used to say “Having a baby changes everything.” One way this phrase especially rings true is the changes to parents’ personal finances.

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According to the U.S. Department of Agriculture, child rearing is a costly endeavor. From birth through age 17, for middle-income households, the cost to raise a child in 2015 was $235,670. Add in post-secondary education and child rearing expenses, from cradle through college, can easily exceed $300,000.

In addition, there are dozens of prenatal expenses including doctor’s fees, maternity and baby clothes, nursery equipment, and, possibly, infertility treatments. If parents choose to adopt a child, there are even more expenses. Private adoptions can easily cost $15,000 to $20,000 with lawyers’ fees. Another “expense” is foregone income if a parent decides to stay home full time to raise a child.

Conventional cash flow wisdom is to increase income and reduce expenses to make ends meet. Having children often results in the exact opposite scenario. Expenses increase at exactly the same time that income either stays the same or is reduced. Many new parents make the mistake of trying to live their previous lifestyle on credit cards and get in over their head accumulating debt that will take decades to repay.

Below are seven recommendations to share with service members who are becoming parents:

Revise Your Spending Plan- Prepare a new spending plan (a.k.a., budget) that includes new child-related expenses such as baby food, toys, life insurance premiums, pediatrician co-payments, and child care. The only way to pay these new expenses with the same or a reduced income is to decrease expenses elsewhere.
Revise Your Income Tax Withholding– Having a child affects the parents’ income taxes. There is a child tax credit for parents of children under age 17 ($2,000 in 2018), the earned income tax credit for income-eligible workers with children, and the child and dependent care credit for parents who pay for child care so they can work or search for a job.
Plan Proactively- Prepare a list of anticipated expenses and calculate the total cost. Add a “miscellaneous” category for unanticipated items. Consider what you would do if the mother requires bed rest and is unable to work up until delivery. Try to pro-rate prenatal expenses (e.g., $4,000 divided by 9 months = $445 per month) and “pay as you go” rather than purchasing everything at once on credit.
Shop Inexpensively– Consider making purchases at consignment and thrift shops and garage sales for clothing and nursery equipment in good condition. Another money-saving option is hand-me-downs from friends and family members.
Investigate Employee Benefits Related to Parenting– Explore your options for parental leave, Family and Medical Leave, maternity coverage, disability coverage, and pediatric care. Contact your employer’s human resources department for information and assistance.
Plan Your Estate- Draft a will, or revise a previous one, to name a guardian and back-up guardian for a newborn child. Guardians do not necessarily have to be family members. Parents can choose anyone they feel would be best suited to raising their child. You can also name different guardians to raise a child and manage their inheritance. Be sure to discuss your selection with the designated guardian(s) first.
Start an Education Fund– Begin saving as soon as possible for college or post-secondary education/technical training. The earlier parents start saving for college, the less they’ll need to set aside because compound interest will work its magic. Parents with a long time frame (10 to 18 years) also have adequate time to invest in stocks and stock mutual funds and ride out market volatility.