How to Financially Prepare for a Child

Dear Expecting to be Expecting,

First things first, having a child is a monumental decision and planning for it properly can make the journey easier for you and your family. Props to you for pausing and thinking about all the factors before jumping in. 

Let’s start with the first part of our reader’s question: 

How much does a kid actually cost?

According to the US Department of Agriculture, the average cost of raising a child through the age of 17 is $233,610. 

Does that number seem off to you? Well, you’re not alone. This average can feel super off for a lot of families, especially the clients that we serve here at Steward. Based on the households we serve (with average income of ~$200K / year), we’ve found that most parents are spending $4K - $6K / month on childcare alone, and also around $20K - $40K per year for private school. This means we’re looking at total costs of $1 million+ for raising a kid—and that’s just taking into account childcare and private school (not even including college!).

Of course, everyone’s financial situations and child expenses will vary, but over preparing and accounting for more costs than less will protect you financially.

Let’s dive into exactly what some of these costs are:

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The Big Three

Childcare: These costs are highest when your child is under 6 due to daycare costs and nanny expenses. In the US, the average cost for a nanny is around $694 / week and the average cost for a day care center is $182 / week. Expect to pay upwards of $30K each year for childcare.

K-12 Education: This expense can vary based on whether you choose a public or private school route for your child. Private K-12 schools average at around $12K / year, but the elite schools can certainly reach upwards of $50K / year. So baking in a higher price point is probably the safer option. A fancy preschool and kindergarten can get pretty pricey too, so don’t overlook those costs.

College: I know you’re probably dreading this one. College is getting more and more expensive each year. Again, expenses vary based on in-state vs. out-of-state tuition, public vs. private college, etc,. The average cost of private college is $43,775 and the average cost of public college for out-of-state students is $28,238. Just like K-12 education, some universities can cost significantly more—with some of the top private colleges having a current total bill of $80K+ per year. That’s why the earlier you start saving for their college education, the better!

Ghost Expenses

These expenses are often overlooked by expecting parents hence their “ghost”-like nature. We’re pointing them out now, so you can avoid the financial blindside.

Housing: Does your home currently meet all of your needs? What about your future kid’s? Moving and/or renovating costs to make your home kid-friendly are expenses that are often overlooked by parents. Additionally, if you choose to go the public school route, many families strategically plan to move to a zip code with a better public school. This could lead to higher housing costs overall that you weren’t expecting, so keep that in mind when planning.

A Gap / Change in Income: Most parents figure they’ll take some sort of maternity/paternity leave in the months that come after childbirth… but what many don’t actually think about is how it will impact them financially. Federal law doesn’t even mandate that the leave is paid! Only 40% of employers offer paid maternity leave in some form. Check with your employer to see what they offer and if you qualify. Additionally, there often is a motherhood penalty—a dock in pay for being a mom… A study from the Harvard Kennedy School found that mothers were recommended a 7.9% lower starting salary than non-mothers. This change in income is something to keep in mind when financially planning for a kid.

Other Expenses to Keep in Mind

These expenses definitely do not encapsulate all of the necessary (and random) expenses that come with having kids. Examples of other costs to keep in mind are food, clothing, transportation, and activities like summer camps and sports. Part-time babysitters should also be factored in as your kid grows up.

Calculator Tools

Check out these two calculators to get an idea of what your child’s expenses will be: 

For a more intense overview (seriously, this one is hardcore), check out this spreadsheet tool by Lauren Berk. Read up on how it works before you dive in and then adjust all of the inputs to fit your expected costs.

For a more streamlined, simple cost projection, check out our Steward Kid Calculator. Input all of your preferences and the calculator will project out how your monthly spending will look over time. Check it out here.

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How do I prepare and save for all of these child-related expenses?

Starting to Think About a Family / Trying to Start a Family

Have a money talk (and baby talk) with your partner: If you haven’t already, talk to your partner not only about how you feel about money and spending, but also about your expectations for having a kid. Talk about your hopes and fears. Be honest and open with each other. That’s the foundation for successful parenting.

Start or check your emergency fund: If you don’t already have this rainy day, emergency fund, now it the time to start! You never know when you’re going to need it, especially when you factor in an accident-prone kid. With the varying costs of raising a kid, you might not always have the disposable income to take care of emergencies. So by having a separate, dedicated emergency fund, you can protect yourself. The amount you put into the emergency fund varies on what will make you sleep at night. For some people, that’s 3 months of expenses, for others, it’s 6 months; on the extreme end, some people only feel safe knowing they could get fired tomorrow and have a year’s worth of expenses saved up in their emergency fund. Think about what feels right for you and start funding!

‍Start saving for retirement: Hopefully, you’ve already started on this one, but if you haven’t, there’s no time like the present! You will likely never have lower expenses than right now—with no kid to take care of… yet. By getting ahead on retirement from now (using a traditional or Roth IRA), you can build generational wealth for your kid. 

Start building a $20K - $30K “baby fund”: Essentially, the fund should act like a cushion to help you prepare for baby costs. Starting to save before you’re pregnant can help you get ahead of the curve. This fund can be repurposed for fertility costs if needed or can be used to help fund a longer maternity leave.

Check if you qualify for a “healthy mom, healthy babies” style insurance program: This program varies by state, but it is a case management program for high-risk pregnant women and their babies less than 1 years old. It can provide the mother and child access to healthcare, physical and behavioral health services, postpartum treatment, home visits, and health education.

Optional—Start saving for child’s education through a 529: This may not be for everyone. Some people are superstitious and feel like starting to save up for future kid’s education before they’re born (or before you’re even pregnant) is asking for trouble. To each their own! If you would feel better by starting to save up for your child’s education expenses now, then the 529 is the way to go! We’ll touch on this more in the “Going Forward” section, but TLDR: if you want to start now, go ahead and put the 529 in your name and fund it. Then change the beneficiary to be your child once they're born. Easy peasy. 

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While Pregnant

Plan for maternity/paternity leave: It’s important to know how much time you and your partner can get off of work and whether you’re paid or not during that period. This can significantly impact your household finances (i.e. the ghost expenses mentioned earlier). US labor laws regulate paternal leave and require 12 weeks of unpaid leave annually for mothers of newborn or newly adopted children, but there are requirements (see below). Several states and a number of individual employers offer paid parental leave. California, Massachusetts, New Jersey, New York, Rhode Island, Washington, Oregon, Colorado, Connecticut, and DC guarantee (or will soon guarantee) paid family leave is usually administered through disability insurance programs. Only 17% of American workers have access to paid family leave. The average parental leave in the US is 10 weeks, paid or unpaid. The policies vary by company drastically: Netflix offers up to 52 weeks of paid maternity leave, Google offers 24 weeks of paid leave, Facebook and Amazon offer 16 weeks of paid leave. And some companies have no paid leave. That’s why understanding your company’s policies and your state’s laws will help you get a more accurate picture of what a parental leave would look like.

Qualifying for the labor law regulated 12 weeks of unpaid leave:

• Your company has 50 or more employees within 75 miles of your workplace
• You’ve worked for your employer for at least 12 months (doesn’t have to be consecutive)
• You’ve worked at least 1,250 hours in the 12 months preceding your leave

Questions to ask HR or colleagues about parental leave:

1. What are the procedures for taking time off for maternity/paternity leave?
2. Have other parents ever negotiated more time off?
3. Can I use vacation or sick days for maternity/paternity leave? Am I forced to?
4. How far in advance do I need to notify HR about my leave?
5. Can I use short-term disability insurance?

• Short term disability insurance pays somewhere between 50 and 100% of your salary for a certain number of weeks after you give birth. It’s included by some states like California and NJ, but the policies vary by employer and state. You also might not be eligible for a policy once you’re pregnant. That’s why checking in on this with your HR department is important.

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Understand your health insurance and anticipated costs: Read up on your health insurance policies and forecast your expected costs early in the pregnancy. There’s loads of medical bills when it comes to prenatal care, labor, delivery, and postnatal care. Ensure you’re covered properly by your insurance plan.

Check on your life & disability insurance: If you don’t have life insurance or disability insurance, get it right now! They can provide worst-case scenario protection for your spouse and future kids. Check if you have employer-provided life insurance and bake that in too. A good benchmark for life/disability insurance is coverage of 10x your salary + $100K per kid as a start.

Re-evaluate your current housing: As we mentioned earlier, sometimes your current housing doesn’t fit all of your needs and future baby’s needs. Is your home baby-friendly? Can you make it baby-friendly easily? Is there enough space for a new housemate—one that grows in size nonetheless?

Draft your pre-baby budget: Once you figure out what you’ll be spending out-of-pocket on medical costs, think about how you and your partner’s income will be impacted in the coming months. Prepare a shopping list for your new family member and adjust your budget accordingly. The amount of money you can spend on your baby has no upper bound; there’s plenty of expenses to cover and tons of options with different price points. Budgeting tip—set a strict limit on how much you spend on both necessary items (like a crib or baby monitor) and optional buys (like the designer-print stroller with the LED lights). Consider buying second-hand to keep spending under control.

Plan your post-delivery budget: After delivery, there are many recurring costs to budget for. Expenses include diapers, clothes, childcare, extra food, formula etc. and these costs will change your total household expenses for years to come. Planning for them now prevents you from being caught off guard.

Choose a pediatrician: Look within your insurance network to find a pediatrician you will use for your newborn. Your baby’s first doctor appointment will probably be in the first week or so of their life, so you want to have a pediatrician picked out beforehand. Get recommendations from family and friends. Call around to local clinics and maybe even meet/interview the pediatrician before you make your choice. Unless you want to pay out loads of cash for a private pediatrician, confirm with your insurance company that the pediatrician you select is within their network.

‍Estate planning: Yes, this applies to you. And yes, you should set it up before you give birth. Once your baby is born, you won’t have time to get to this to-do, so get it done now! You can write it now such that it applies to future children and any children thereafter, so less updates are required. The reality is that tragic events do happen in life. Setting up an estate plan is planning for a God-forbid scenario and ensuring your kid will be protected and taken care of. It’s the least you can do for them. Without an estate plan, the guardianship of your kid will end up in court. You definitely don’t want that to happen, so set up an estate plan asap. The “Core Four” of estate planning include a will or revocable trust, advance medical directive, durable power of attorney, and final instructions. Check out our blog post all about estate planning here. Additionally, we’ve compiled a list of recommended estate planning attorneys by state to help you start planning; check it out here!

Outsource: Sometimes, you just don’t have the mental capacity to deal with finances when you’re pregnant and that’s okay! Consider outsourcing—hire an accountant or a financial planner—especially if the chore of finances just seems like another burden you want to get rid of. Here at Steward, we are dedicated to opening up the 1%'s wealth strategies to America’s up-and-coming families with a combination of 21st century tech and trusted advisors. We help families determine how, where, and when to invest and save in plain-English, with minimal time and effort. Steward can help determine the best way for you to prepare for a baby financially, or we can at least get the conversation started. Give it a try here. Additionally, check out other recommended providers in our blog post here and our compiled list of recommended accountants here. 

• Outsourcing now vs. once the baby is out of the oven might be one of the best times to do it. With kids comes more time commitment and less time for filing taxes. A lot of this prep guide is focused on “baby stuff” but taking care of your mental health and your family by setting up automated systems around finances can have huge payoffs that last a lot longer than newborn outfits.

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Relax: At the end of the day, try not to stress too much. Stress is certainly not good for those who are pregnant. By preparing properly for a kid, you’re making life easier for future you. You’re doing the right thing by reading this post and being proactive. Take a deep breath and relax. Enjoy being pregnant. It’ll all be okay in the end!

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First 30 Days

Add your child to your health insurance: Most times, you have 30 days from your child’s birth date to add them to an existing health insurance policy. Some employer-based plans give you 60 days. Cross check with your employer to see if this applies to you. Regardless, you’ll want to add your child to your plan sooner than later, so you don’t end up with the scary combo of a sick baby and no coverage.

Begin planning for childcare: Finding the right daycare or nanny can take weeks, so get started way before your maternity leave is up. You’ll need to visit daycares with your kid and interview nannies to see if there is a mutual fit. For daycares, you might also have to complete an application and go through an approval process, so bake in time for that. For nannies, you may want to have them complete a background check. Check out the Park Slope Parents website—a community of parents in Brooklyn, NY either expecting a child or with children under 18. They’ve compiled resources on all things nanny—including Nanny 101 how-to-hire guides. They even conduct surveys among parents in their network that provide interesting insights. The most recent nanny survey revealed that the average pay for a nanny in their network was $18.65 per hour for one child and $19.94 per house for two children. In general, conduct online searches to determine competitive wage amounts in your area. Check out this article by The Bump on the pros and cons of daycare vs. full time nanny, and this article by Kidsit that breaks down the cost differences between the two.

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Going Forward

Adjust your beneficiaries: Hopefully, you followed along this guide and you have life insurance already set up for yourself. Now, you should add your child as a beneficiary. The same goes for your 401(k) and IRAs. If you set up a 529 before giving birth, now is also the time to change the beneficiary to be your child. You’ll need to make adjustments to your estate plan to fully ensure that your kid will have access to the money from these different avenues.

Keep funding your retirement: When you have a kid, it can be easy to forget to check in on your own personal goals and path to financial freedom. Don’t forget about the long-term! A good bottom line is to always aim to put aside 20% of your income for your future self. The only time you can pay for retirement is in advance. Other expenses like your child’s college tuition, for example, can be paid before (using 529 plans), during (just as an expense), or after (via student loans). Thus, continuing to fund your retirement must take precedence. Time is of the essence.

‍Save for their education: College is costly, but you can make paying for it manageable by saving early through a 529 plan. Three things that make a 529 totally worth it: (1) they grow tax-free, (2) they have tax-deferred growth, and (3) they even have an upfront tax deduction in most states. They’re also very flexible; you can always change the beneficiary to someone new in case your kid becomes a viral pop star overnight and forgoes college for fame. Check out our blog post all about 529s and how to set one up here.

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Do you want someone to guide you and your partner through newborn finances and reaching financial freedom? Reach out to me at ami@oursteward.com or schedule a free 15 min consultation to see if we’re a good mutual fit.