As my husband and I learned recently, expanding your family from one to two kids comes with a number of financial aspects to plan for.
By Julia K. Pham, CFP®, AIF®, CDFA®, Wealth Advisor at Halbert Hargrove as Featured in Kiplinger
If you’re a parent, you already know how overwhelming bringing your first child into the world is. Everything is new and may feel a bit scary. By the time you welcome your second child into the world, you may feel more confident, like you’ve learned a thing or two and that you know what you’re doing.
I certainly did when we welcomed our daughter (and second child) last October. We were more relaxed – and took things day by day. We even procrastinated a little bit on the prep work for the new baby because we had done this before and thought, “We’ve got this.”
I knew having a second child would change the dynamics of our family, but certain financial aspects took us by surprise. What follows are some things that I learned when my husband and I grew our family of three to a family of four.
Medical benefits change, as well as medical needs, often affecting the costs of bringing a new life into the world. Between my first and second pregnancy, my husband changed jobs, resulting in a change in our medical insurance. A pleasant result of that change was that the out-of-pocket cost of my daughter’s birth was significantly cheaper than the birth of my son.
I know that not everyone is as lucky though, and costs could swing the opposite way. Remember to factor in the benefits of any new insurance policies, including making note of co-pays and deductibles. Since I found that it was difficult to figure out beforehand how much our medical expenses were going to be, it is also very important to note your out-of-pocket max, which is a cap on the amount of money you pay for covered medical services in a year. Once you meet that limit, your plan will cover 100% of your health costs for the rest of the year.
Also, if your company provides access to a health savings account (HSA) or flexible spending account (FSA), take advantage of it. These accounts can be used on eligible medical expenses and funded with pre-tax dollars directly from your paycheck – reducing your taxable income.
A growing family requires more space. We were shocked at how cramped we quickly felt when adding our second little one, especially since she is barely crawling! Between all the clothes, toys, bottles and baby gear, coupled with the lack of time to organize, we decided a move was in order sooner than we anticipated. This increased our budget considerably.
In fact, housing costs represent the largest portion of household budgets for Millennials. Statistically, we Millennials are more conscious of finances than prior generations when deciding to start or grow a family, so maybe this is something you’ve already factored in. All these things added together, were a great reminder to revisit our budget and cut any discretionary expenses.
In the U.S., the average cost of center-based infant care is $1,230 per month. I surprisingly learned that adding a second child offers very little benefit by way of a family discount – if any. Our particular day care I looked into only provided a 5% discount for a second child, which is fairly common.
If you have a two-working-parent household, you should be prepared to double the cost of your child care. This expense is a big reason one parent often steps away from their career to raise young children – if their income doesn’t exceed the child care costs significantly.
If your employer offers it, utilize a flexible spending account for dependent care, which is similar to the medical FSA and funded with pre-tax dollars. This account can be used to pay for eligible expenses, such as day care, babysitting,or nanny expenses. You can also team up with other parents to hire a nanny who cares for a couple of families, thus halving your child care costs.
Hand-me-downs are great. I am all about reusing baby gear and clothes to save money, but there are some things that just can’t be salvaged since babies are, well, very messy. With that in mind, be sure to consider the additional cost of items that can’t be reused, like the baby clothes you can’t scrub the food stains out of. Surely you haven’t forgotten how many diapers babies go through. The American Academy of Pediatrics shares that families may spend close to $936 on disposable diapers in the first year alone.
Another surprise cost you should be aware of? There may be safety recalls in between the birth of children that may require new car seats, cribs or strollers – which don’t come cheap.
The average cost of college in the U.S. is $35,331 per year, including tuition, books and living expenses. With costs increasing at an annual rate of 6.8% per year, what many parents of multiple kids don’t realize is that by the time their second child goes off to college, the cost could be drastically higher.
I was surprised when looking at the difference between what we might potentially spend on our son, who was born four years ago, versus our daughter. You can help minimize the pain of sticker shock by utilizing an online college cost calculator, which can provide a better picture of how much you need to save each month to get to your goal.
529 college savings plans are a great savings vehicle for college expenses, and offer tax-deferred growth on investments and tax-free distributions when used for qualifying expenses. If you start contributions early, you can really take advantage of compound growth. In addition, other family members can contribute to the account besides parents in lieu of birthday and holiday presents.
There is a balancing act required of all parents – all while 76% of Millennial parents are carrying some kind of debt. Having a second child is a big emotional and financial decision. The bags under my eyes are a little heavier, and my bank account a little smaller. All that being said, the added considerations easily fall to the wayside with one smile from my daughter.
While financial factors aren’t a deciding factor in growing your family, taking these things into consideration before your new baby’s arrival can impact how prepared you feel when they’re finally here.