Becoming a Parent: The Financial Considerations

Once you have a child, financial planning for the future becomes even more essential. How will you finance child care, medical bills, food, education, clothing, toys, and education savings? What will you need to spend money on and how much will each item cost? Here is some of the information you will need.

This Financial Guide provides you with guidelines on handling the expenses a child brings. Obviously, we cannot offer precise costs because the costs hinge on variables such as family size, family income, and geographic location. However, we can suggest some rough (often very rough) estimates for an average family (whatever that is) to at least provide a starting point for your planning. Obviously, the costs for later years will go up as inflation takes its toll.

Knowing what to expect will allow you to plan for the future, thereby increasing your chances that you will not fall short of your financial goals. Indeed, this is the time to review and update, if necessary, your financial plan.

Related Guide: Please see the Financial Guide: YOUR FINANCIAL PLAN: Getting Started On A Secure Future.

What Will It Cost You

Here is a breakdown of the items you'll need and an estimate of their cost. The costs are categorized chronologically, according to the child's age.

Note: These estimates are for a first child. Bear in mind that second or third children will cost less than the first, since you will already have purchased many of the items you need. If you have three or more children, you will spend about 22% less on each child. Also, note that, in the case of a multiple birth, expenses will be higher than (although not double) those of a single birth.

Government estimates say that a family with an average income of $172,330 will spend a total of $366,660 to raise a child to age 17. If you include the cost of college--$35,000 per year or more--that cost goes up over $401,000. The cost estimate drops with income level; Average income $76,520, cost estimate is $221,190 and average income $36,380, cost estimate drops to $159,870.

Planning Aid: For an estimate of the amount of money you would have at the time your child enters college if you begin saving now, see the Financial Calculator:The College Savings Plan Calculator.

Related Guide: If you are ready to start planning now for your child's future college education-and indeed the time to start is now-please see the Financial Guide: YOUR CHILD'S COLLEGE EDUCATION - How To Finance It.

If your child requires orthodontia, add another $10,000. If you buy your child a car, add that in as well. For an only child, add 25% to the cost.

Birth Through Infancy

Here are the costs you can expect up to birth and during the first year:

Note: For a second or third child, you will spend much less on furniture, clothing, and toys, but health care, child care, and food will remain the same.

Hospital Costs

An uneventful delivery costs about $8,000-$10,000, and a Cesarean section $12,000-$14,000. Depending on your coverage, you will pay anywhere from zero percent to 30% of this cost.

Baby Supplies and Equipment

Before you even bring the baby home, you will buy a lot of baby supplies and equipment. These include a crib, a changing table, a swing or other rocking device, strollers, car seats, high chairs and basic baby clothing. You can estimate $2,500-$3,000 for these items.

Formula

A year's worth of formula concentrate costs about $1,200. If you buy the ready-to-serve type of formula, the cost is even more.

Child Care

Child care expenses vary widely. Child care in a day care center costs much less than a live-in nanny, and prices for day care centers vary widely. For a mid-priced day care center, you will pay $200-$250 per week for your infant's care, or about $10,000-$12,500 per year.

Planning Aid: Child Care Search provides a search feature for various types of child care providers such as preschool and day care.

Health Care

Your infant will visit the doctor about six times during his or her first year. This estimate includes well-baby check-ups as well as the inevitable colds and fevers of infancy.

How much you will spend out-of-pocket for doctor visits during the first year depends on your health insurance. If you are in an HMO, you will pay only the co-payment. (If your baby needs prescription medicine, you will pay the co-payment for that too.)

But if you are covered by traditional indemnity insurance, well-baby visits may not be covered at all, or only a percentage may be covered. This means (assuming a doctor's visit costs $60) you will pay $45 to $60 per visit for uncovered visits and $45 per visit for medically necessary visits. You will also need to pay for prescriptions.

Toys and Clothes

You will spend about $500-$600 on toys and clothing during the first year (in addition to what you bought for the layette.)

Total For The First Year

Your total expenses for the first year run about $15,000-$18,000. The biggest variables are child care and health care.

Planning Aid: Family.com provides a variety of information on raising children.

Ages One Through Six

During these years, you will spend about $1,000-$1,200 on toys and clothes and about $700-$850 a year on food. If your child attends day care or pre-school, add in the cost of these items. Health care costs could run the gamut, depending on your health coverage. Day care will cost you approximately $10,000-$12,000 per year, while pre-school costs vary widely.

Ages Six Through Twelve

This is the time when, overall, the expenses of child-rearing drop, and families can save more. It is an excellent time to increase what you put away in savings.

During these years, your child care expenses will drop drastically, which could mean an extra $10,000-$12,000 annually that can go into savings or towards some other purpose. And you will not have to take your child to the doctor as often, since they will be past the childhood-disease stage. (Of course, if your child begins orthodontia during this stage, or has a special medical problem, you will have to pay more.)

You will spend more than in the previous stage on clothing, toys, and entertainment, but your kids will not be demanding the high-ticket clothing and other items of adolescence. The bill for food will be just slightly more than what it was in the previous stage.

Now that your kids are in school, you will want them to have all those extras that middle class kids have: dancing and music lessons, sports participation, and so on. All of this costs money and if you decide to send your kids to private school or to summer camp, these expenses will have to be added in.

Ages Thirteen Through Eighteen

During this stage, you can expect your child's food, clothing, and entertainment bill to greatly exceed what it was during the previous stage. For instance, food will cost about $2,000-$2,500 per year, and clothing about $1,000-$1,500 per year-or more.

Once your teen starts driving, your auto insurance will go up. The extra cost could be anywhere from $300 to $1,000, depending on your state of residence and whether your child is a boy or girl. If you intend to buy your child a car, add this expense in.

Sweet-16 parties, bar and bat mitzvahs, orthodontia, SAT-preparation courses, music lessons, sports…these are just some of things you might be paying for during those years.

Teaching Your Kids How to Handle Money

The best time to start instilling financial skills and values is when children are young. Start giving your kids an allowance once they reach school age. Let them participate in making the decision of how much their allowance should be.

Some parents may want to require kids to do household chores to earn the allowance. Or, parents might want to provide an allowance, but pay kids extra for the performance of tasks. This incentive plan is, of course, a matter of individual child-rearing philosophy, but it does get the message across that money does not grow on trees.

Give your kids control over their own money (their allowance and whatever monies you give them that are not earmarked for some particular purpose). You can make suggestions to them about what they should do with it-i.e., that they might spend half and save half-but allow them the final say on what happens to the money.

Let them see the consequences of both wise and foolish behavior with regard to money. A child who spends all of his money on the first day of the week is more likely to learn budgeting if he is not provided with extras to tide him over.

How much allowance to provide is a matter of parental discretion. Most parents provide about $7 per week to their elementary school children, and from $12 to $20 a week to kids in junior high.

Savings and Investment

Beyond the basics of budgeting and saving, you will want to get your child involved in saving and investing. The easiest way to do this is to have the child open his or her own passbook savings account.

If you want your child to get familiar with investing, there are various child-friendly mutual funds available. The mailings from the fund can be a source of education. Or you may want to get the child interested in individual stocks.

You may want to start a "matching" program with your kids to encourage saving. For instance, for every dollar that the child puts into a savings account or investment, you might match it with 50 cents.

If you want to get your kids involved with investing, it will usually have to be done through a custodial account. There are generally two types of widely used custodial accounts-one is set up under the Uniform Gifts to Minors Act, and the other under the Uniform Transfers to Minors Act. The type of custodial account available depends on which state you live in.

With a custodial account, the child is the owner, but the custodian (usually a parent) manages the property until the child reaches the age of majority under relevant state law-either 18 or 21. The custodian must follow certain rules concerning management of the property in the account. These rules are intended to ensure that the custodian does what is in the child's best interests.

IRAs For Kids

If your child has earned income-from a paper route or baby-sitting, for example, or from working in the family business-you can contribute his or her earnings to an IRA. The IRA can be an extremely effective investment for a child because of the IRA's tax-deferral feature and the length of time the money is left in the IRA. If $3,000 per year is contributed to the child's IRA for ten years (2010 IRA contribution limit is $5,000), and the money is left to grow until the child reaches age 65, the amount in the IRA could reach $600,000 or more, depending on the returns on the investment.

To replace the "lost" earnings, the parents can give $3,000 per year to the child (or the amount of earned income the child has, if less). The child may have to file tax returns.

The drawback is that, with some exceptions, the money cannot be withdrawn before age 59-1/2 without tax penalty.

Related Guide: For tax rules on IRA withdrawals for higher education, please see the Financial Guide: HIGHER EDUCATION COSTS: How To Get The Best Tax Treatment.

Taxes and Credit

Kids can learn to use automatic teller machine cards for their savings accounts. They can also start using credit cards at an early age-with parental counsel and involvement. They can learn the concepts of incurring and paying off debts both from credit card use and from small loans that parents make them.

It is important to familiarize kids with paying taxes. If children have to file tax returns-as they would with an IRA--allow them to participate in the process; this will get them used to the idea of yearly tax payments, and can also be an opportunity for learning about how governments are run with tax revenues.

Note: One side benefit of getting your kids involved in money management is that it may help to avoid the "math phobia" some kids experience in junior high school.

Tip: Professional guidance should be considered for a life event change as major as a marriage of divorce.

Recommended Reading

• Kenneth Morris, Alan Siegel and Virginia Morris, The Wall Street Journal Guide to Planning Your Financial Future, (Lightbulb Press, Inc., 1995), ISBN 0684802023.

How much the U.S. Government Estimates It Costs To Raise A Child