Budgeting for a baby: Here's what financial advisors recommend for new parents

Certified financial planner Amber Miller is used to thinking about the costs and challenges of life for her clients. It gave her a leg up when it came to preparing for the birth of her own first child last year.

“We had our daughter, Zahra, in August, and we’re still head over heels about it,” said Miller, a senior financial planner with The Planning Center in Minneapolis. “My husband and I had a lot of conversations heading into it, so we felt pretty prepared, but our shopping bill is still double what we expected.”

Money may not be the very first thing young parents think about when they’re expecting a child, but it should be a priority. Children are expensive. In 2015, the U.S. Department of Agriculture estimated the cost of raising a child to the age of 18 — i.e., before college — at $233,610, or $12,978 per year. Adjusted for average inflation of 2.47% since 2015, that’s now $277,108, or $15,395 per year.

For a couple or single parent making more than $100,000 per year, that is not a crushing burden, but it is for a household with $40,000 in income. The three biggest costs identified by the Department of Agriculture were housing costs, at 29%; food, 18%; and child care and education, 16%.

The figure, however, was an average cost and the study found wide variation in child-related spending based on household income. Families with before-tax income of less that $59,200 spent between $9,330 and $9,980 on children while households with more than $107,400 in income spent between $19,380 and $23,380. In other words, new parents will cope with the resources they have.

Zachary Bouck, managing principal of Denver Wealth Management in Greenwood Village, Colorado, always tries to reduce money anxiety for new parents. “The first thing I tell clients expecting babies is that it doesn’t have to be as expensive as they might believe — particularly in the first years,” he said.

Bouck has three children of his own.

“Little kids just don’t need a ton of things,” he said. The bigger issue with babies is how they will impact household income.

“Will one parent stay at home and, if not, what is the daycare situation?” Bouck said. “If you’re making $50,000, the cost of daycare can be shocking.”

Whatever their income levels, all new parents should draft a baby budget. It will help you prepare for and control costs. Miller at The Planning Center suggests thinking about it from two perspectives: the one-time costs in preparation for having a baby and the monthly ongoing costs thereafter.

On the first front, the cost of pre-natal care and delivery can vary widely depending on your health insurance and your health circumstances. If you are adopting a child or require fertility treatment, the costs will be significantly higher.

The monthly costs for bringing up baby include diapers, food, formula, creams, wipes, bottles, toys and clothes, etc. “Make a list with price tags for everything and then pad it by 1.5 times,” suggested Miller. “There are always things you don’t think of.”

Both Miller and Bouck emphasize that parents should take advantage of any available public assistance programs such as the child tax credit, which was recently raised to $3,600 from $2,000 for children under 6 and $3,000 for other children under 18. The full credit is available to couples earning up to $150,000.

Also tap into informal support networks from friends and family to help reduce costs. “People should engage with their community,” Bouck said. “You’re joining a club.

“All of us with kids are welcoming to new parents,” he added. “There’s a hand-me-down culture for things like clothes and toys.”

Also be prepared for costs to rise as your child grows. They will eat more, need more clothes, and want more toys and stuff.

It is also never too early to think about funding college for your child. While contributions to 529 college savings plans are not tax-deductible on a federal basis, they are in many states. What’s more, the earnings in the plans are deductible if they are used for qualified education expenses.

“I talk about 529 plans with new parent clients right away,” Miller said. “It’s important behavior to build early.”

She suggests parents start with small contributions and, when daycare needs end, shift that money into the 529 plan.

Bouck also recommends an early start to college planning, though he advises new parents to pay off personal debt and get their own retirement planning in order first. In Colorado, the state contributes the first $100 to new 529 plans and has a contribution matching program for lower-income parents.

“I started contributing $25 per month because I was paying off student loans,” he said. “It made me feel good.”