8 Ways Your Budget Changes When You Start a Family
- May 24, 2021
- by Michael
When you decide to start a family you’ll discover a completely new world of expenses to handle. Baby food, diapers, child care, and purchases like car seats, strollers, cute outfits, slings, carriers, high chairs, etc.
When you live alone, or it is just the two of you, your personal expenses are simple in comparison. With a family, priorities change and your budget lines are a lot different. Read on for a breakdown of what to expect when it comes to budgeting for a child.
1) Child Care Costs
The cost of child care is by far the largest and most back breaking expense to consider when raising a young child. It can be like having a second mortgage (per kid).
Generally speaking it is currently cheaper to send a kid to college than it is to put them into a full time (M-F 7am – 6pm) daycare. Like college, the cost of nannies, day cares, and preschools have shot up in the past few years.
Some areas are considered ‘day care deserts’ where it is difficult to line up care due to tight supply. That is why it is ideal to line up care before the baby is born.
Here are your options:
1) Nanny – this is arguably the best for your baby due to the personal attention. However, having a nanny is also the most expensive and complex way to obtain childcare due to the burden of hiring (and possibly firing), payroll taxes and W-2 filings. If a nanny comes to your house for $20/hour and works M-F 8-5, that works out to over $40k per year not counting taxes and benefits.
2) Day care at a well established center – this is going to be around half the cost of a nanny. Your child will gain social skills, get used to getting out of the house every day, and soak up whatever curriculum the school has. All you have to do is drop them off and pick them up. One downside is your child will get sick A LOT. That means you will get sick too. Expect to get calls at work during the day telling you to come pickup your child who has come down with a fever, diarrhea or a rash. Then you will have to wait until they are symptom free for 24 hours before you can bring them back.
Daycares can be anywhere from $1200 - $2400 for 5 days per week depending on where you live.
3) Day care at a small home or with another family - there is a wide range of quality in this area. Check the place out carefully. Make sure they don’t have something really stupid like a pool the child could get into and drown or a staircase that isn’t to code.
4) After school care – once your child makes it into kindergarten pat yourself on the back and enjoy your new cashflow situation. At this point you may only need to pay for care before or after school. Most school have on-site care options at affordable prices. Even if you need both morning and afternoon care, you are looking at $300 - $500 per month.
5) Summer camps – here expect to spend a few thousand dollars are year until they are old enough to be home by themselves.
6) Stay at home parent - one option that eliminates this huge expense is to have one parent stay home with the kids. We wrote a detailed article about what goes into the decision to stay home with the kids.
2) Health Care Costs
Healthcare costs increase when you have a family. A non-subsidized health insurance plan for a family of four averages $1,437 per month. That isn’t counting co-pays and deductibles. The average deductible on a family package for 2020 was $8,439, up 5% from a year earlier.
The price you will pay depends on the package – such as platinum, gold, silver, or bronze. It is up to you to decide what level of coverage makes sense for you.
If you have access to a flexible spending account through your employer that can save you some money on healthcare. However we found using a flexible spending account heavily can sometimes reduce your social security benefits.
3) Saving for College
This is not a required budget item, but many parents opt to pay at least a portion of their child’s college expenses. The idea is to figure out how much you want to end up with in 18 years and work backwards from there. Anywhere from $100 - $500 per month is a good place to start.
An easy way to do it is to setup an automatic monthly contribution to whatever plan you are using. Some parents use 529 plans for the tax benefits. Others setup a simple savings account for their child. The reason to budget for it early is to avoid having to pay out of pocket when they finally get to college.
For more ideas see our previous post: How Much to Save for College?
4) Life Insurance Needs
Parents who want to provide for their families even if they suddenly die will want to get a solid life insurance policy. Usually, both parents take out life insurance that will last until after their youngest planned child is out of the house.
We wrote a detailed post about buying the right amount of life insurance, which includes several examples. A simple way to look at it is to get a 25 or 30 year policy before your first child is born with at least $1M of coverage for each partner, plus any debt you have.
Depending on your health and age, expect to pay $200 - $800 per year for coverage.
5) Changes to Your Taxes
Hey some good news!!! Your taxes are likely to go down a bit!
There are several tax breaks when you have a child. First is the child tax credit which is $2,000 per year, more for younger children. Then there are credits for dependent care and several other less common ones that may apply to you which will give you a few dollars back. Your CPA or tax software program will walk you through it.
If your baby is due in late December it will work out better tax wise if your baby is born before the stroke of midnight on December 31st. Otherwise the credit will be lost for that year. If you are the husband, you might be better off keeping that to yourself. Especially don’t bring it up to your wife while she is in labor.
6) Housing Changes
When you add a family member you will suddenly need more space at home. A young married couple should think about how prepared their home is to accommodate a new family member.
Having an extra bedroom matters but other things weight into it such as safety of the neighborhood, proximity to good schools.
I'm not even going to try to give you an estimate here because there are so many factors. In general places to live that are good for families and close to jobs are in very high demand.
7) One Time Expenses for Your Baby
Your bundle of joy needs a lot of stuff to keep them comfortable:
- Crib + mattress + sheets
- Swaddling blankets
- Stuffed animals
- White noise machine
- High chair (for when they are big enough)
- Car seat(s) - one for each vehicle
- Furniture for their room
The list goes on. Consider spending anywhere from a few hundred to several thousand dollars to get your first born setup nicely. This is where the baby shower comes in handy.
8) Ongoing Expenses for Your Baby
When you have a child a number of little ongoing expenses come up (excluding child care):
- Diapers / Wipes / Ointment, plus a larger trash can. Or you can go with a cloth diaper cleaning service – well worth it for a baby with sensitive skin.
- Baby food – good quality food can be expensive.
- Clothes – they grow so fast! Shoes are particularly expense.
- Sports / Music lessons – once your child is 4 or 5 years old you might find your self out in the rain on a Sunday watching a bunch of kids play soccer.
There is no way to completely prepare for having a child. There are up front costs with the birth and getting the nursery setup. Then there are new ongoing expenses to budget for. Getting the money side of it dialed in will help you at least be financially ready for your baby. That will give you more time an energy to focus on your little one. Enjoy it while it lasts because they grow up so fast!