Starting a family is exciting, and when you begin to have children, you will likely adjust your savings goals, budgets, and the way you manage money. In addition to diapers, formula, clothing, and other daily baby essentials, there are also some other important costs you will need to consider before welcoming your new family member.
In many households, parents return to the workforce after having a baby, and if you plan on doing the same, you will need to factor the cost of childcare into your budget.
According to the Economic Policy Institute, the average annual cost of childcare ranges from $5,000 to $24,000 depending on where you live, the age of the child, and the type of childcare you procure. You can search state averages here. While this is often the largest expense for parents, it’s one of the most important! The question is, how can you afford it?
One option is to enroll in a Dependent Care FSA through your employer-sponsored benefits program. With this program, parents can use pre-tax dollars for dependent care, such as daycare, after school programs, summer camp, and more. Because money is contributed on a pre-tax schedule, anything used for dependent care will not be subject to payroll taxes, meaning you are paying all or a portion of your childcare, tax-free. Best yet, in 2021 dependent care FSA limits were raised to $10,500 from $5,000. This is a huge savings for families! To learn more, check with your benefits administrator.
Healthcare and Insurance
When your child is born, don’t forget to add your new family member to your insurance plan. Because childbirth is considered a life event, your health plan can be modified outside of the open enrollment period. While most plans allow up to 60 days from the day your child is born to add them to the account, you should report the change as soon as possible. If you don’t already have one, consider a tax-advantaged health care account, such as a health savings account (HSA) or flexible spending account (FSA). These tax-advantaged accounts can help offset the burden of expenses such as doctor visits, breast pumps, baby monitors, thermometers, and more. Here’s a list of eligible expenses or check with your health plan administrator.
When you have a child, you gain certain benefits during tax season, including the ability to claim an additional person on your taxes (as long as they are under the age of 19). This means that you may be eligible to claim a portion of your child’s expenses from the child tax credit and the child and dependent care credit. Check the 2020 tax rules for children and dependents provided by the IRS before filing to ensure you have the proper documentation.
As a reminder, be sure to use the IRS withholding calculator to verify the amount you should be withholding each year so there are no surprises when it’s time to file your annual taxes.
Housing and Vehicle Needs
Growing a family often means the need for more space, and whether that comes in the form of a car, house, or both, it’s something you’ll want to consider in your family budget.
If you’re moving, you’ll want to assess your budget to ensure you have the funds required for a down payment and closing costs, as well as enough for any repairs or additions the home may need. If you are expanding, that may result in a larger mortgage, or require additional funds over time. Consult with a loan officer before starting the home buying process to ensure you’re on the right track financially.
If you plan on moving, you’ll also want to consider which school district you’re moving to. Dropping your child off for kindergarten is only a few short years away, and depending on where you live, school districts can make a big difference in the educational and recreational opportunities your child will have.
You will also want to consider a vehicle that works for your growing family. Your two-door sports car probably won’t accommodate a car seat and stroller, so look into vehicles like SUVs or minivans to make room for children and their belongings. If you’re on a budget, consider shopping used car lots or websites like Carvana to find pre-owned gems. You can also use the site to sell the car you’re replacing so you have extra funds to put toward a new purchase.
Saving for Education
Another expense to consider is your child’s future education. Because college is a large investment financially, saving when your child is young will give you the time you need to save enough money for college. Some options to consider include:
- Coverdell Education Savings Account (ESA): This is a tax-deferred account sponsored through the U.S. government to assist families with educational expenses. As long as the account is created before the beneficiary turns 18, parents can contribute funds to the account and watch the money appreciate over time without taxation until the student enrolls in a financial institution.
- 529 College Savings Plan: Parents can invest after-tax contributions in the form of stocks, bonds, or other investment types that can be used for qualified educational expenses, like tuition or required textbooks.
- 529 Prepaid Plan: Tuition costs can be covered using this tax-advantaged account option. By making contributions, parents can secure current tuition prices for their child without being affected by rising costs later.
Slavic401k has a blog about saving for college that details various college savings plans. To find the best option for you and your family, read the blog here.
When you’re welcoming a new family member, there are many ways your budget will change, so it’s important to track your income and expenses appropriately. And as a busy parent, you may not always have time to sit down and think through everything. Financial tracking apps like Mint or Spendee make it easy and stress-free, allowing you to manage your finances and your budgets at your fingertips. Check our favorite tracking apps here.
If you find yourself needing to slim down in some areas of your budget, consider these saving tips:
- Get a part-time job for companies like Uber or Shipt. Use the extra income for your child’s college savings, a new car, childcare expenses, and other necessary expenses.
- Eat-in and pack your lunch for work instead of eating out every week.
- Shop on Facebook Marketplace or Nextdoor for secondhand products, like furniture, books, toys, etc.
- Consider reusable diapers instead of disposable ones. According to The Bump, this change can save you thousands of dollars.
- Utilize your local library for free books and games instead of purchasing them brand-new.
- Use coupons whenever possible!
Continue to seek information and educate yourself on the life changes you’re about to experience, and if you get lost along the way, remember that Slavic401k offers free blog content to help you establish or expand on a solid financial foundation.
Questions? Contact us here.