This is part 1 of a series. You can read part 2 here. And part 3 here.
A new child touches most parts of your life. Sleep deprivation and the loss of free time are perhaps the most directly felt, but there is also a significant impact on your finances. This blog is the first in a series aimed at helping new parents become more aware of how children will financially impact their lives.
The decision to have a child is one of life’s defining moments. As with any major life event, it is vital to be aware of the financial implications and have a sound financial plan in place. It’s a bit strange to think about whether or not you can “afford” a child, but in our modern world, children are one of the largest expenses a family will incur.
According to a 2011 United States Department of Agriculture (USDA) study1, the average cost to raise a child born in 2011 from birth to age 18 will be about $235,000 for a middle-income family. High income families can spend hundreds of thousands more on their children. For many parents, this figure is just the beginning, with college tuition bills still to come.
Build a Financial Plan
Given these large numbers, expectant parents should consider how their “bundle of joy” might stress their savings and retirement plans. To create a simple financial plan, you can lay out your income and expenses using Quicken or a spreadsheet. But if your situation is more complex, consider working with a Certified Financial Planner™ (CFP®).
Changing Income and Expenses
A new baby will almost certainly cause your household expenses to go up. New expenses may include:
- Basic needs: car seat, stroller(s), crib/beds
- Child care (nanny, daycare, babysitters)
- Medical expenses not covered by insurance
- Smaller, but recurring costs: diapers, formula, clothes
- Upgrading your housing to accommodate a larger family
Switching from a two-income to a one-income household? If so, lost income may be slightly offset by reduced income tax and payroll tax expenses (Social Security and Medicare). But also consider the potential loss of valuable benefits, including employer retirement plan contributions and subsidized medical insurance. Even if both parents plan to continue working, time off for parental leave may temporarily reduce your income.
Revisit Your Investment Plan
This is also a good time to re-evaluate your investments. If you have a holistic investment plan in place, you probably want to reassess your plan based on a new outlook of your future income, expenses, and potentially a changing comfort level with investment risks. For example, if you won’t be saving as much, you might consider a lower-risk portfolio since you won’t have new money to invest if there is a market downturn.
If you don’t have a formal investment plan in place, use this as an opportunity to develop a strategy tailored to your age, investment goals and risk tolerance. Many people start investing by putting a little money into mutual funds, and perhaps buying a few shares of stock – all without thinking about their overall portfolio. If this is your situation, you may want to seek advice on crafting an appropriate portfolio allocation.
If you have previously researched investments yourself, consider whether it’s how you want to spend the little free time you still have. An experienced investment professional can provide an objective third-party viewpoint, an established investment process, and hopefully a broader perspective on investment choices.
If you recently left your job or still have a retirement account with a former employer, consider a “rollover” of your 401(k) to an individual retirement account (IRA). A rollover is the term applied to transferring funds from an employer-sponsored retirement plan – like a 401(k) – to an IRA. In addition to simplifying your life, you generally get a broader selection of investment options (often with much lower expenses) while maintaining the tax-deferred status.
Plan for Success
As the saying goes “she who fails to plan, plans to fail.” Taking time to think through the financial implications of your new life is time well spent. Expenses will increase, household income will potentially decrease, and your families saving and investing plan should reflect these new realities.
In my next posting, I will discuss some concrete steps you can take to enhance, protect, and simplify your financial life.
1. Lino, Mark. (2012). Expenditures on Children by Families, 2011. U.S. Department of Agriculture.
Savant Capital Management is a registered investment advisor. Registration with the SEC does not imply a certain level of skill or expertise. Information contained in Savant’s marketing material should neither be construed as the provision of personalized investment advice nor as a guarantee that a certain level of results will be achieved.