Million Dollar Baby: Financial Planning For Your First Two Babies

The US government estimates that the average American family spends about $233,610 to raise a child to the age of 17. Very few of us conduct baby financial planning before getting pregnant or when expecting a child.

A new addition to the family will completely transform your monthly budget. You will need to buy diapers and extra food and save for their education.

So on top of choosing a name and preparing the nursery, it’s important to come up with a baby budget. Keep reading to learn the basics of baby financial planning for your first two children.

1. Notify Your Insurance Providers

One of the first things you should do when you find out that you are expecting a baby is to check and update your insurance plans. Your current health insurance should already have provisions for prenatal and postnatal care for mother and baby. Find out what is covered and what you will need to pay for out of pocket.

Once the baby is born, ensure that they are immediately added to your health care scheme. Most plans allow you to add a child within 30 to 60 days after they are born. But confirm the actual requirements of your cover.

If you have a dependent care HAS or FSA, increase your contributions to reflect the size of your new family. These plans cover many baby healthcare costs including infant formula and breast pumps.

But remember unlike HSAs, dependent care FSAs don’t rollover. This means you’ll lose any funds that you don’t spend. Be sure that you limit your FSA contributions to the expected amount you will spend on your children’s health care.

If your family relies on your financial income, having a child should trigger you to sign up for or increase your life insurance. In case of any eventualities, your babies will have a financial cushion to rely on. The same goes for long-term disability insurance. It is prudent to take this cover in case you get injured and can’t work anymore.

2. Update Your Household Budget

A new baby can increase your household budget by about $12,980 a year. Your second child may be a bit cheaper due to economies of scale. If you have a monthly household budget, update it to include the extra expenses that a new baby or babies will bring in.

You’ll have one-off costs like buying a crib, stroller, car seat, etc. You will also have recurring monthly costs that include baby food, diapers, insurance, etc. A budget will give you a heads up in case you need to increase your monthly income.

Some parents find that they may end up needing to take a second job or start a side hustle to cover the additional expenses. But lack of planning may cause you to fall into debt if unexpected expenses crop up.

3. Increase Your Emergency Savings

If you don’t have an emergency fund, then this is the time to get one. This is a savings account that amounts to between 6 to 12 months of your living expenses. If you unexpectedly lose your source of income, you have a 6-to-12-month cushion to find another job or business.

Consider that a baby will considerably increase your monthly budget. As such you must increase the amount you may have saved up to match your new monthly expenses.

4. Claim Your Tax Breaks

Children are expensive which is why the US government gives you a tax break for every child you have. You can claim a Child Tax Credit (CTC) of up to $2000 per child. This amount gets deducted directly from your tax bill so the tax relief can put a dent in your childcare expenses.

5. Update Your Will

Whenever you get a new child, you must always remember to add them to your will. Name the child as a beneficiary of your estate and assign them a guardian until they turn 18 or 21.

If possible, let trusted family members or friends know how you prefer to have your will administered. Also, include specifics about preferences for raising your child. This clears up any confusion about your instructions.

6. Save Up For Education

Another key step you must take when financially planning for your new babies is to save for their education. The government gives tax breaks on 529 savings plans that are geared towards paying for college education or private K-12 education.

You can also start a small fund to start saving for their daycare education. The first 5 years are the most important for a child’s development. So placing them in the best daycare and best pre-schools will give them a head start.

7. Plan for Your Retirement

Financial planning for a baby is not an excuse to forget your well-being. Planning for your retirement should be a top priority so that the financial burden does not lie on your children after your retirement.

Financial advisors argue that retirement planning is even more important than saving for your children’s college education. This is because while they are in their 20s, they can work and pay for their fees or take out a student loan.

If you can afford it, plan for both your retirement and a college fund. If your funds are tight, focus on your retirement.

Take full advantage of employer-matched 401k’s as your employers are giving you free money towards your retirement. You also get tax breaks on retirement savings so do not forego retirement planning.

Start Early on Baby Financial Planning

Early baby financial planning goes a long way to preparing for most of the additional expenses you will incur as new parents. For single mothers who are pregnant, facing a lot of anxiety can be expected, but planning for your baby’s expenses will reduce some of those fears.

Use our checklist above to organize your finances well before the baby arrives so that you can fully enjoy the time with your newborns. For information on early childcare education, read this article on our blog.