The Brooklyn FI Guide to Having Kids
Starting a family usually doesn’t come cheap. For a middle-income, married couple, the total cost of raising a child comes in at around $267,233. Before you freak out, keep in mind that this is only a rough estimate. Housing, food, and childcare make up the biggest expenses, but these things can vary widely from family to family.
With that said, having a child represents a huge shift in your financial focus. All of a sudden there’s this little person who needs you—and providing for them while continuing to work toward your own financial goals can feel like a balancing act.
We’ve got you. Read on for a quick but thorough financial guide to having kids. You’ve got enough on your plate already so hopefully we can help you sort out some of the no-brainer money stuff.
Planning for Childcare
Childcare can be a huge expense for working parents, but your employer may be able to lighten the load while your child is a newborn. The Kaiser Family Foundation reports that about one-quarter of employers offer some degree of paid parental leave. A handful of states have also passed legislation to provide the same.
Beyond that, your unique family situation will determine the level of childcare you need. You might have more flexibility if you or your partner can work remotely, or if either one of you can dial back to part-time work until your little one starts school. Just keep in mind that there are financial trade-offs either way. If you do choose to step out of the workforce for a bit, which is totally fine if that’s what works for your family, it means pushing pause on your retirement contributions. This can have a ripple effect that leaves lots of parents (usually women) playing catch-up with their retirement savings. That’s not to say it isn’t worth it—just that planning ahead with your financial advisor can help protect your future.
Families that do need regular childcare for an infant will find that it can be a hefty expense. The average cost is just north of $1,300 per month, according to the Center for American Progress. This number generally goes down for toddlers and preschoolers, but it’s certainly something to think about. We suggest researching average costs in your area to get a better idea of what you can expect.
Estate Planning
Estate planning may not be at the top of your list, but it’s super important when you have kids. It’s essentially your plan for leaving a financial legacy. Updating your will is front and center. If the unthinkable were to happen, you want to make sure your kids will be in good hands with a guardian you trust. Another thing to think about is how your assets are to be distributed when you’re no longer here. Now is the time to update your beneficiaries on your retirement accounts and life insurance policy. (More on this in a minute.)
Establishing a trust fund may be on your radar as well. This would serve as a holding place for assets that you plan to leave to a minor child. You would name a trustee to manage the trust and carry out distributions as outlined in your will. For example, this could give your child the ability to use these funds to cover educational expenses or medical bills. What matters most is getting these things in writing; something a skilled financial advisor could help you figure out.
Squaring Up Your Life Insurance Policy
It’s wise to find a life insurance policy sooner rather than later. If you or your partner passes away, the death benefit can provide critical financial support for the surviving spouse and children. The right plan for you will depend on your budget and risk tolerance. For most young families, a term insurance policy is an inexpensive way to ensure your loved ones will not have to change their lifestyle. Imagine if you’re the breadwinner and you pass away suddenly, your family would lose your income and might struggle to pay the rent on the apartment you’ve lived in for years.
Term life insurance: You pay a monthly premium for a predetermined period of time. If you pass away during this time, your beneficiaries will receive a death benefit. If all goes well and you outlive the policy, your coverage ends.
Saving for College
The average cost of a college education in the U.S. is over $35,300. Our advice is to start saving as early as possible. Opening a 529 plan can be a great option. It’s a tax-friendly investment account you can tap to cover qualified education expenses. This includes tuition, room and board, books and more.
Contributions grow tax-deferred, and qualified withdrawals are tax-free. What’s more, there are no contribution limits. Check with your state to see what 529 plans may be available to you. From there you can decide on a savings target that’s compatible with your monthly cash flow. Brooklyn FI LOVES 529 plans.
Alternatively, you might consider opening a Coverdell education savings account (ESA). They mirror 529s but are slightly different. You can only contribute up to $2,000 annually and income limits apply. However, they cast a wider net in terms of what counts as a qualified education expense.
Preparing for New Day-to-Day Expenses
At the starting line, new parents would be wise to plan ahead for costs related to pregnancy, prenatal care and childbirth. Check with your insurance carrier early on to better understand what’s covered and how your deductible works. This can help you ballpark your estimated expenses. Bringing home baby also requires loading up on essential gear—car seat, crib, stroller, you name it. (Plugging into local Facebook groups can help you find a network of gently used secondhand items.)
Beyond these one-off bills, having a child comes with all sorts of new day-to-day financial responsibilities. There’s food, clothing, extracurricular activities, summer camps, and other pop-up expenses. It underscores the importance of having a healthy emergency fund. Shoot to save up three to six months’ worth of expenses. If that feels overwhelming, just start where you are and aim for a lower savings target. What matters most is having some cash on hand to see you through your next financial surprise.
The truth is that it’s impossible to plan for everything, and raising kids is a wild adventure. But at Brooklyn FI, we understand that preparing your finances can help make for a smoother ride.