The welcoming of a child is one of life’s most wonderful and transformational events. There are many things to prepare and coordinate, including your finances. Raising a child requires significant time, energy, and expense. Thinking through financial aspects in advance can help ease your mind as you welcome your new little one.
Children bring immense joy along with expense. There’s a lot involved in raising a child. Common expenses include food, clothing, baby gear, toys, health insurance, other medical expenses, and childcare. Of these, childcare is frequently the largest expense, sometimes making the earlier years of life the most expensive. Even when childcare expenses end, other expenses will arise such as activities, camps, and perhaps college costs.
It’s important to develop a realistic budget that incorporates the necessities and aspirations that come along with becoming a parent. Costs should be evaluated relative to income, savings, and goals. Life as a parent often involves compromises. These might extend to your finances, requiring the prioritization of objectives.
Ideally you already have a pulse on your current budget helping to identify “extra” money available for child-related costs. If the addition of a child makes the budget tight, it’s strongly recommended to explore ways to cut expenses. One sure thing about becoming a parent is that there will be unexpected expenses. Your budget needs to have the flexibility to absorb unanticipated costs, along with having an emergency fund.
Childcare vs. Staying at Home
Unless family members are willing to cover childcare requirements, the only alternative to paid childcare is one parent staying at home. This election can enhance family bonds, but frequently requires sacrificing income. It’s important to consider the following before making the decision to stay at home:
- Can your finances support the loss of income, and for how long?
- Will your family’s health insurance coverage and premiums be affected?
- What is the likelihood that a stay-at-home parent could return to the workforce after an extended absence, and at what compensation level? Returning to the workforce can be difficult, frequently involving professional role changes and pay reductions.
- How will staying at home impact your savings and Social Security benefits due to gaps in income?
- Will staying at home require changes in your long-term goals such as funding private school, college, or retirement?
- Is your family financially protected in the unfortunate event of death or divorce?
Daycare vs. Nanny
Childcare for working parents creates a significant cost. Daycare is typically cheaper than privately paid childcare, but not always depending upon how many children you have. Daycares often extend discounts for siblings, but the total expense still rises with multiple children.
An important decision in deciding between daycare and private care is the schedule of care such as the hours required, coverage over holidays, and policies when your child is sick. Frequent gaps in care will likely affect your ability to work. Nannies and au pairs can offer more continuity of care, perhaps with greater flexibility.
An au pair is a foreign individual who helps with childcare in exchange for room, board, and modest compensation. For this reason, they are often a more economical option than a nanny. The duration of their employment is typically limited to one to two years. The costs of an au pair are often similar to daycare, depending upon the number of children you have.
While nannies are typically more expensive, they do offer the benefits of privacy and potential longevity. Unlike an au pair, nannies seldom live in your home, offering greater privacy in your home. They also have the ability to remain with your family for several years, offering the potential for longer-term continuity of care. One additional financial aspect beyond base compensation is the need for payroll processing, tax reporting, and associated tax payments. Payroll services can help with such obligations, for additional costs.
Fortunately, the Federal tax system recognizes the expense of raising a family. Such recognition includes Flexible Savings Accounts (FSAs), made available by many (but not all) employers. FSA accounts allow you to save money on a pre-tax basis and use those savings for medical or childcare expenses. The tax benefits help to reduce your true out-of-pocket child-related costs. However, FSA contribution limits are often well below actual childcare costs.
Planning for the totality of your child raising years is nearly impossible. However, one important forward-looking consideration is your intention to provide for education expenses beyond public school K-12. If your parental aspirations include private school or college tuition, early savings are likely required, and strongly recommended. Furthermore, they should be evaluated relative to other savings goals to ensure you and your family are on solid financial footing.
- Private vs Public Schools: Private schools have many added perks, but distinctly with additional costs. Funding private school typically requires greater financial resources than funding college given a longer duration in years. There are many things to consider about private school, including the financial costs.
- Saving for College: A common parental objective is seeing your child attend college. College costs have risen dramatically over several decades, sometimes making college tuition one’s greatest lifetime expense. There are various college savings plans to help you prepare.
If either private school or college are important family objectives, it pays to start saving early. The earlier you start, the more you can save and the greater the investment earnings you can capture.
Protecting Your Family
It’s difficult to contemplate a premature death or disability at any stage of life, particularly when celebrating the beginning of life. However, becoming a parent includes the recognition that your child is fully dependent upon you. Part of being a responsible parent is ensuring that your child will be protected, even in the event of an unfortunate medical event.
The primary ways to protect your family include having adequate insurance and planning documents. Obtaining such documents and insurance coverage should be part of your budget.
Becoming a parent brings immense joy and new responsibilities. Being prepared helps to foster healthy and secure family structures. SageVest Wealth Management recognizes and supports all aspects of family financial planning, helping clients and their families reach their life goals with the guidance they need and deserve. Please contact us to learn more.