Stressed about how much it costs to have and raise kids?
Having extra mouths to feed barely scratches the surface of the expenses to come. From larger housing to larger cars, higher health care costs to higher education, diapers to child care, strap in for a costly ride.
But like everything else in life, it helps to be prepared. The better your financial planning, the better you can navigate the costs without derailing your current lifestyle.
How to Financially Prepare for a Child
If you tried to make every ideal financial move before having kids, you’d reach retirement age before even trying. So don’t think of these as prerequisites for trying to get pregnant.
Instead, think of them as parts of your larger financial plan that apply more than ever as you start having children.
1. Reconsider Your Income
There’s nothing wrong with pursuing low-paying work you love. I never believed my mother — an educator — when she said, “Do what you love, and the money will follow.” She proved me wrong by achieving a seven-figure net worth through frugal living, working a side hustle (tutoring), and consistent investing.
But your motivation matters. There’s a difference between choosing a modest-income career because you’re passionate about it and being stuck in one due to inertia.
I know teachers who love what they do and wouldn’t want another job even if someone offered to double their salary. Others coast their way through every tedious lesson plan.
If you don’t love what you do, go back to the drawing board. That goes doubly if you also don’t love your salary.
Brainstorm jobs that provide fulfillment and meaning to you personally. Then get creative and explore remote positions, jobs that provide free housing, or jobs that pay well even without a college degree.
Choose a career that fulfills you both personally and financially. It doesn’t need to pay a huge salary, but aim to get up every morning happy with the career choice you made.
2. Enroll in Health Insurance
Pregnancy is expensive. So are delivery, infant checkups, and pediatric health care in general. If you do nothing else before your baby arrives, get health insurance.
Fortunately, not having insurance through your employer doesn’t mean you have to go without it. Explore options for health insurance without employer coverage. There are even part-time jobs that provide medical insurance.
Note that families with a high-deductible health insurance plan may well burn through every dollar of that deductible over the course of pregnancy, delivery, and the first few months of life. Plan accordingly.
Low-income families can explore the Children’s Health Insurance Program as another option.
3. Revamp Your Budget
Once upon a time, I spent more money on happy hours, dinners out, concerts, and entertainment in general. My budget looked different before I got married, and then it changed again after my wife and I had children.
That’s normal. Your budget isn’t static. It’s a living thing that evolves over time alongside your life. And if you do it right, you can save more money even after having children. I managed to do it through a mix of house hacking, getting rid of a car, and moving overseas.
4. Check Your Emergency Fund
You never know when an emergency or unexpected job loss could leave you without an income. And when you have children, the stakes are higher.
As you prepare for the responsibility of a family, set up an emergency fund to cover two to 12 months’ worth of expenses.
How much you need depends on the stability of your income and expenses. The more variable each is, the more months of living expenses you should stash away. An average person needs three to six months’ expenses, but people with inconsistent incomes or living expenses need closer to a year’s worth.
You can always temporarily cut out costs like entertainment or a gym membership to save on expenses. But needs like electricity and food are nonnegotiable.
And while some of your expenses may go down while you’re unemployed (such as gasoline), others may go up. For example, if you spend $200 per month on employer-subsidized health insurance, that expense may rise while you’re unemployed, as you may be forced onto a new plan or required to pay for your current plan in full.
5. Get Serious About Paying Off Unsecured Debts
Many people have unsecured debts, such as credit card debt, personal loans, and student loans. And those often come with high interest rates that exceed the long-term returns you can earn by investing.
Once you incur the added expenses that come with having kids, you’re less likely to have room in your budget to chip away at that old debt. Plus, the interest on it can make the expenses your child requires that much harder to manage.
While baby-related expenses tend to be significant initially, they don’t completely go away once your children are done with diapers. In fact, school-age kids can cost more than infants because they require more expensive clothing and food as well as money for activities like soccer lessons and ballet classes.
6. Plan for Child Care
Child care is the elephant in the room when planning the financial costs of having children.
Explore all your child care options, from nannies and au pairs to day care to relatives and friends. If one parent doesn’t love their job, you can explore becoming a single-income family, with one parent staying home for the first few years of your children’s lives.
Whatever you decide, plan and budget accordingly — because parental leave will be over before you blink.
7. Plan for Baby Essentials
My wife wouldn’t let me try this experiment, but I believe you could get everything you need for an infant for free — or almost anything.
Diapers cost money, and there are some things you should never buy used for safety reasons. Everything else you can get either free through services like Freecycle or inexpensively used via eBay, Craigslist, or local garage sales.
Whether you buy used or new, get creative to save money on baby gear. See this baby supplies checklist from The Bump to ensure you plan for every need.
8. Update Your Will
Your estate plan does more than tell your family and friends who gets your autographed guitars after you die. It also makes provisions for child care if you die prematurely. Your will can include provisions for an unborn child, which you can amend after they’re born.
You have a couple of options for creating a will (or any other estate planning documents):
- Do It Yourself. You don’t need a lawyer to create a valid will. You simply need to be 18 or older and of sound mind. You also need to sign your will in front of two witnesses and ensure it’s accessible once you die. You can use an online service like Trust & Will to draft one affordably.
- Hire an Attorney. The cost is significantly more, but a lawyer handles all the details for you. Expect to pay anywhere from $300 to $1,000 for a basic will. If your assets and estate are complex or you need to establish a trust, it could cost upward of $10,000.
Optional Financial Moves to Consider
Some moves could help you feel more ready for kids, though they aren’t strictly necessary. If you can’t do them, no need to worry. In fact, some people may decide holding off on these is smarter than doing it before they have kids.
So consider this type of financial planning purely optional: a list of ideas for thought rather than more reasons to fret.
9. Reevaluate Your Housing
You can care for an infant in a studio apartment. They certainly won’t know the difference. But that doesn’t mean you’d enjoy it.
As a long-term planning exercise, think about what type of home you want to live in for the next few years. You don’t need extra bedrooms or bathrooms right away, as infants can sleep in the same room as you for a while. Even when they move out of your room, they could move into a room with an older sibling.
But you may decide you want a larger home, so start thinking about what that looks like and how to pay for it. Only buy a home if you plan to stay for at least a few years, as closing costs on either end of the transaction make it cheaper to rent otherwise.
10. Reevaluate Your Transportation
If you and your spouse each drive two-seat sports cars, one of you may need to swap it out for a more family-friendly option.
Of course, you don’t always need a car. My wife and I don’t have one. We simply take the car seat with us when we hire an Uber. I also installed a baby seat on my bike so I can transport my daughter that way too.
Consider the public transportation, walkability, and bikeability of the area you live in. It’s possible you could live without a car too.
But most Americans drive cars as their primary means of transportation, so if yours is either too small to fit your whole family or unreliable, it’s probably time to get a different one. But explore used cars first as a more budget-friendly option.
Give yourself more flexibility by choosing three to five models you’d be happy to buy, and shop around among both dealerships and individual owners to find the ideal used car for you and your growing family.
11. Buy Life Insurance or Disability Insurance
In households with one breadwinner or a partner who significantly outearns the other, life insurance makes sense. You want to ensure your family would survive financially if it lost that primary breadwinner.
Life insurance policies come in two broad buckets:
- Term Life Insurance. Term life offers coverage for a specified period. It’s generally cheaper and comes with a guaranteed set death benefit. With term life insurance, your premiums increase at preset intervals, such as 10, 20, or 30 years.
- Whole or Universal Life Insurance. Also known as permanent life insurance, whole or universal life insurance death benefits never expire as long as you pay premiums. These policies often also provide certain living benefits, such as the ability to borrow money against the policy.
As a rule of thumb, your death benefit should be six to eight times your annual salary. But there are other considerations to take into account, such as your homeownership status and anticipated number of dependents as well as how much you can afford.
The same concepts apply to long-term disability insurance. Both protect against the risk of the breadwinner losing their ability to earn.
Granted, not everyone needs life insurance or disability insurance.
For example, my wife and I live on one income even though we both work. We live on her income and save every dime of mine. And we don’t have life or disability insurance because we maintain low living expenses relative to our income and a high savings rate to build our net worth quickly.
If either of us kicked the bucket tomorrow, each of our incomes would be enough in itself to support ourselves and our child, and the surviving spouse would have a hefty nest egg to fall back on in a crunch.
Avoiding the need for life insurance and disability insurance by “self-insuring” are two of the many hidden benefits of pursuing a financially independent lifestyle. Once you build enough money, you can opt out of life and disability insurance.
12. Double Down on Retirement Investments
I joke that my backup plan for retirement is my daughter. If she were old enough to get the joke, she wouldn’t laugh.
The worst thing you can put on your adult children is asking them to take care of you in retirement. It adds a burden on them in an already hectic time of their lives, when they’re trying to start and raise their own families.
Before you even consider setting aside money for their college education, take a closer look at your retirement investments. If you have the slightest worries about them, put more money into your tax-sheltered retirement accounts long before saving money for your kids’ college tuition.
They have many other ways to pay for college, but you only have one way to pay for your retirement.
Invest money now so it can start compounding, and decide what to do with it later. You can withdraw contributions from a Roth individual retirement account tax- and penalty-free to put toward any costs, but you can only use 529 plans or ESAs for education costs.
13. Invest to Help With College Costs
Not paying your kids’ college tuition doesn’t make you a bad parent. Young adults who pay for their own college education often take the experience much more seriously. And many parents question whether to help with college even when they can afford it.
Even small amounts invested when your child is young can compound into significant sums by the time they turn 18. If you decide to chip in, you have several tax-friendly options to do so.
- 529 Plan. Your 529 college savings plan earnings grow and remain tax-free if you spend them on qualified educational expenses.
- Coverdell Education Savings Account. A Coverdell ESA works similarly to a Roth IRA for education expenses. There are income limits ($110,000 for single filers and $220,000 for married), and the maximum allowable yearly contribution is $2,000, regardless of your income.
- Upromise. Upromise allows you to earn cash back to use to pay for college. Unlike 529 plans and ESAs, you don’t have to contribute additional money. Rather, you earn cash back on expenses like online retail purchases and restaurant meals.
In all cases, you can open the accounts early and designate your child as a beneficiary after birth.
As much as I preach fiscal responsibility, I know firsthand that putting off children doesn’t always make sense, financially or otherwise.
My wife and I married in our early 30s and agreed to spend one year building a foundation for our marriage before having children. Then one year became two, then three.
I started a business, and my wife worried about money. Then we went through a rough patch in our marriage. We survived it but had reached our late 30s by that point.
When we finally started trying in earnest, nothing happened, which kicked off a stretch of infertility questions and interventions. Eventually, we did have a child, but not all couples are so lucky.
Many of my friends haven’t experienced the joy of having children despite spending large sums of money — not to mention enduring immense heartache — trying to do so. In one of life’s bitter ironies, many delayed trying for children because they worried about money.
On the opposite end of the spectrum, I know plenty of parents without much money who have multiple children. And every one of them finds a way to make it work.
There’s no perfect time to have children. They disrupt your life in every possible way. But like billions of parents with less money than you have, you’ll find a way to make it work too.