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Becoming a parent is one of the biggest milestones that happen in life. It is also a huge financial undertaking that can be overwhelming to think about. There are those big expenses such as the cost of the baby’s first year, including diapers, child care, insurance, and other baby necessities. Budgeting for a baby and being prepared with saving for children’s future will go a long way in alleviating these financial stresses. Let’s talk about how to budget for a baby, broken down with tips for each stage of parenthood.
Budgeting for a Baby From Birth to Age Three
It’s time to review all your financial goals and current budget when a baby is coming. Revising your budget will allow you to allocate funds towards saving for their future. The cost of a baby’s first year is often a surprise for first-time parents. Here are the things you should consider doing to make your new budget work:
Take Out a Life Insurance Plan
If you don’t have a life insurance plan, now’s the time to get this coverage. It is an important step on how to budget for a baby. You want to ensure your child is taken care of if something happens to you or your spouse. Life insurance provides financial protection for your family in case an unexpected event happens. Life insurance is one of the best saving plans for a child. Their policies will help replace lost income so that you can still pay the mortgage, childcare, and other daily living expenses.
Already have a life insurance plan? You can review it to see whether it might make sense to increase your coverage. Your insurance coverage amount should factor in current income levels, spending needs, savings, and debts. Term life insurance policies are a popular option due to their affordability. This coverage lasts for a predetermined amount of time-based on your selection. These terms are usually available in 10, 15, 20, or 30 years increments. Don’t forget to make sure that both you and your spouse have a plan.
Add Health Insurance Coverage
Budgeting for a child isn’t complete without reviewing your health insurance plan to see what the cost is to add your new baby to your coverage. Compare plans with your spouse to determine who’s plan has the most favorable terms. Some items need to include how much your premiums will increase, co-pay amounts for office visits, and the difference between PPO and HMOs.
Figuring out childcare has many considerations for you and your spouse to weigh. If one parent is staying home, that might alleviate those additional childcare costs. If that’s not the case, you could be looking at the in-home daycare, getting a nanny, or looking at daycare centers. The price tags for each of these options can vary quite a bit, and each of them has its pros and cons. Some employers have tax-advantaged saving plans to help parents with childcare costs. Be sure to ask them about this savings account for the baby as it can help with budgeting for a child.
Start a 529 Savings Plan
It’s never too early to start thinking about saving for your child’s future. Even though they might be in diapers today, getting financially prepared will offset those education expenses that come down the road. A 529 Savings Plan is a tax-advantaged college savings plan that can be used toward college expenses. It’s the best savings plan for the child to start during this time because it gives you the advantage of growing. There are two types of 529 plans: Prepaid tuition plans and college savings plans. States offer at least one 529 plan. Recent updates to the program have also added up to $10,000 in K-12 tuition coverage annually. Investing for children’s future with a 529 plan is a smart move!
Take Out a Savings Account or Certificate of Deposit
Another savings option is to set up custodial accounts using the Uniform Gifts’ provisions to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). These joint accounts enjoy the tax advantage of being taxed at the child’s rate. That means the cost of taxes is probably going to be less. The money legally becomes theirs once your child is an adult at 18 years old.
From about age three, your child will be in school, which may break your budget. Consider these items when you budget for school years with your child.
Your childcare costs are slashed once your child starts attending school. Instead, it would be best if you considered creating a budget for items they will need for back-to-school. To budget for school, you should include clothing. They will be growing out of clothes often during these years, so having the right clothes shopping strategy is important. Decide if you will purchase the new clothes, using the old ones, or buy them online. You might be able to leverage some hand me downs or provide staples each year to keep expenses under control.
Continue With College Savings
Revise your budget to incorporate any changes that might be necessary. Contribute what you can do for the best saving plans for a child. Don’t forget to prioritize saving for your retirement. Investing for children’s future should not come at the expense of your own. You should maximize your retirement accounts each year. You can start saving for children’s future by using birthdays and holiday gifting as opportunities to make a contribution from friends and family.
Activities and Vacations
Besides the budget for school, you will likely want to sign them up for activities to help them become well-rounded individuals. Taking piano lessons, dance, soccer, baseball, and other activities can add up costs. Decide how much you can budget for these things. Your child should be invested in these activities, too, so you’re getting value out of them.
During the summer, you may need to find options to provide care for your child. Dual-working households may consider sending their child for field trips and summer camps. Family vacations may also be an event that occurs a few times a year. Make sure you’re considering the added travel costs when you have a child over two years old. You’ll need to pay for an extra airline seat, a ticket to a theme park, and other added expenses.
Don’t forget that when you prepare the budget for school, think about preschool costs when your child is not old enough to attend kindergarten. This expense can vary from a few hundred dollars a month and up from there.
The Teen Years
There are no more savings accounts for the baby during this age to worry about. As your child is preparing to get ready for the real world, consider these tips below.
Give Them an Allowance
You could even provide an allowance much earlier than 13 to help them learn the value of money. Agree on a set amount weekly, bi-weekly, or monthly in exchange for help around the home. You may also agree on setting up an allowance for certain purchases. For example, you should provide a quarterly clothing allowance. They will be responsible for doing their research to find out how much it costs to cover the items they want.
Encourage Them to Start Working
A child’s first job gives them the chance to join the “real world” while earning money outside the home. A job will build a strong work ethic that will come in handy later in life. They’ll learn time management skills by juggling school, work, and other activities too.
Purchase a Car
Depending on your financial situation, you might have your child borrow one of your cars or purchase one for their use. If they are working, they may even contribute to the purchase of one. Ask your child to pay for driving expenses, including car insurance, in exchange for using a car.
Preparing Your Child to Leave the Nest
As they head out on their own, the responsibility of budgeting will shift over to them. Help them out with this transition by doing the following:
- Create a budget together. Please help your child to put together a budget before they leave for college. They should find a realistic estimate of what they will need each month.
- Talk about expenses to split. Decide which expenses will be split between you and them.
- Hold them accountable. The hardest part of a budget is following it. Consider reviewing the budget together monthly to see how well they have done. You may want to load only your agreed-upon amount onto a debit card to help manage these expenses. If they continually have problems managing their budget or aren’t checking in, you might want to take away funding for the next month.