A financial planning 'to-do' list for new parents

Babies are a cause for celebration. But a new child also requires some careful financial planning by the parents.

Indeed, that little bundle of joy comes with some pretty big financial expenses.

The average cost of raising a child born in 2015 to age 18 for a middle-income family in the U.S. is roughly $233,610, or $284,570 when adjusted for inflation, according to the U.S. Department of Agriculture. That figure does not include the cost of a college education.1

To provide for your growing family, you as a parent must take steps to get your financial house in order.

Rework your budget

For starters, you’ll need to budget for basic needs.

According to Babycenter.com's calculator , you can expect to spend roughly $70 per month for diapers, $105 each month for formula (if not breastfeeding), and $60 monthly for solid baby food as your little one matures. Other monthly expenses to factor in: $60 for clothes; $35 for toys, books and media; $21 for toiletries and $23 for medicine and first aid products.

You may spend an additional $500 or more on one-time family expenses such as car seats, strollers, diaper bags, bottles, changing tables, and cribs.

And, if you plan to continue date night with your spouse (highly advised for parents), you should factor in babysitting expenses, which average roughly $10 per hour.

Estimate childcare costs

Perhaps the biggest potential cost of raising babies and kids, however, is childcare — especially if both parents plan to continue working full-time.

Costs vary dramatically based on geography and whether you opt for a lower cost day care center, or live-in nanny.

Data from the non-profit Child Care Aware of America’s 2018 survey reveal the cost of child care in the U.S. averages $11,314 annually for an infant and $9,139 per year for a four-year-old in a day care center.2 Live-in nannies can cost upwards of $30,000 a year.

You’ll eliminate that expense if one of you quits your job to stay home with the baby, of course, but you’ll lose a second income. There is also the financial impact of forgone promotions to consider, which may impact your future salary if you return to work in a few years, plus the opportunity cost of temporarily sidelining your retirement contributions.

As you do the math to determine what works for your family, keep in mind that plans are subject to change. Many new parents who expected to stay home with the baby decide they’d be happiest returning to work — and vice versa. Financial planning gives you the tools to stay flexible.

Health insurance

Once the baby arrives, you will also need to add him or her to your family’s health insurance policy promptly.

Many plans require new parents to do so within 30 days or risk the loss of certain benefits until the next open enrollment period. Contact your insurance provider to find out what their terms are and get any enrollment forms you may need.

Here again, the expense of family health insurance will impact your disposable income.

The average annual family premium for employer-sponsored health insurance in 2017 was $18,687 with workers on average contributing $5,218, according to the Kaiser Family Foundation/Health Research & Educational Trust.3

If you and your spouse are offered health insurance coverage through your employers, crunch the numbers to determine which offers the better benefits.

Life insurance

You’ve got a dependent now. Life insurance is a must for many new parents, said Paul Bennett, a financial planner in Great Falls, Va., in an interview.

Such coverage helps ensure that your spouse and children will be able to maintain their standard of living should you die.

How much coverage and what kind of policy you need depends on your family’s monthly expenses, net worth, and income. Some financial planners, however, suggest seven to 10 times your annual income as an appropriate starting point. ( Life Insurance Calculator )

Life insurance comes in three basic varieties: term, whole life, and universal.

Term life policies provide coverage for a limited number of years -- often 15, 20 or 30. If you outlive the term, the policy’s coverage expires and no benefits are paid out. Most term policies allow for continuation after the initial term, although usually at a higher premium. Term insurance is generally more affordable than whole life or universal coverage.

Whole life insurance is designed to guarantee for your lifetime a specified benefit payable to your spouse or other beneficiaries upon your death. It also accumulates cash value over time and offers the opportunity to earn dividends.

Universal life insurance is a hybrid, of sorts, allowing the purchaser to set her own premium (beyond a required miniumum) and death benefit. In essence, it is a permanent insurance policy that combines insurance with an account that earns a tax-deferred rate of return declared by the insurance company.

There’s no one insurance policy or coverage amount that’s right for everyone. Some people prefer to consult a financial professional to sort through the options. Whichever policy you choose, however, it’s important to choose a company in good financial standing.

You can check an insurance company’s financial health by looking at its rating from credit rating agencies like Moody’s, which gives top tier companies an “Aaa”, and A.M. Best, which gives its highest ranked companies an “A++”.(Check here for MassMutual’s financial ratings ).

Meanwhile, disability income insurance provides you with income should you become too sick or injured to work. ( Calculator: How much disability income insurance do I need? )

Beneficiary forms and wills

After any life event, including a marriage, divorce, or birth of a child, you should update the beneficiary forms for your life insurance policy, annuities, and retirement accounts, such as your IRA or 401(k).

Such forms, which typically trump your will if a discrepancy in beneficiaries exists, help ensure those assets will eventually pass to your heirs outside of probate. Probate is the lengthy and costly legal process by which the courts settle your estate after your death.

If you haven’t done so already, both parents should also work with an attorney to create a will, a living will, and powers of attorney, especially if you have children from a previous marriage, says Bennett.

Don’t shortchange yourself

It’s natural to want to give your child every advantage, including a college degree, but just be sure any savings you sock away for your child’s education do not come at the expense of your own financial well-being — a classic parent mistake.

Once you’ve paid your monthly bills and contributed a significant portion of your salary towards retirement, you can consider using one of the savings tools available to give your progeny a head start.

The 529 education savings plan, for example, enables parents to invest after-tax dollars in mutual funds or similar investments and any earnings are tax free if used to pay for college costs. Earnings not used for qualified expenses will be subject to federal and state taxes, plus a 10 percent penalty.

As such, parents who think their child may get a scholarship to school, or decide not to pursue a degree may be best suited saving in a Roth IRA, from which money can also be withdrawn penalty-free to pay for college costs.

Both tools have financial aid implications, however, and parents are advised to consider their options with care. Again, some parents opt to speak to a financial professional about options.

There’s nothing like a newborn to melt your heart, or drain your wallet. By planning ahead, however, expectant parents can rest assured that their budget is balanced and their loved ones are provided for — even if they aren’t getting any actual sleep.

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This article was originally published in December 2016. It has been updated.

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U.S. Department of Agriculture, “The Cost of Raising a Child,” Jan 13, 2017.

ChildCare Aware of America, “U.S. and The High Cost of Child Care,” 2018.

Kaiser Family Foundation, “Average Annual Family Premium per Enrolled Employee for Employer-Based Health Insurance,” 2017.