Financial Guide For New Parents
Becoming a new parent is one of the scariest things you will ever go through, it’s also one of the most expensive. Throughout the last decade of being a father I have come across several ideas for how to manage finances once children enter your world. Last year I wrote The Effect of Having Kids Young on Finances, about some of the unique challenges posed to young parents. Regardless of the age you become a parent, the following steps should help you be successful.
Save some bank: Typically you get at least a 7 month head start on becoming a parent, from the time you find out until the time the baby is here. Use this time to stockpile cash like crazy. Cash is your friend. Stop spending money on non-essentials, cut back like crazy, and work as many extra hours as possible. Having a cash cushion saved up helps tremendously with medical expenses, child care expenses, clothing, and lost time at work due to being home with your new baby. Sell your extra crap you don’t need now to generate some cash as well.
Don’t do anything drastic: This is the biggest financial mistake I have made. Just days before my son was born, I thought it would be a great idea to buy a house to fix up and rent out to generate some extra income. The problem? Buying the house, which we paid cash for, took the vast majority of our savings. We had very little money for needed repairs, and we depleted our cash cushion just as we had a major new expense coming into our lives. We would have been MUCH better off to have kept the money in cash.
Buy Term Life Insurance: This is for both the mom and the dad, regardless of if one of the parents is planing to stay at home. Term life insurance is extremely inexpensive and is needed to protect your spouse and new baby. Think about how hard it would be for your partner to raise this child without you, without your income, and without your time and effort. When our son was born I picked up a $500,000 20 year term policy for only $20 a month. Yes, Social Security will provide some money, depending on your earnings record for your minor child, but it typically works out to being far less than what is needed to replace your income. It would be a good idea to check out your Social Security record to find out what benefits your child and spouse would receive if you were to pass away as well.
Write a Will: I know, I promise this is the last administrative boring thing on the list! The most important aspect of a will is not who gets your STUFF, it’s who gets your CHILDREN. It’s sad to say, but there are often times when both parents pass away. Who gets the kids? Do you really want the State to decide this matter? Have a Will stating who would care for your children if you were to pass away, make sure that person is willing to do it, and also add that person as a secondary beneficiary on life insurance accounts to be able to afford taking care of your children.
Okay, now that those “big picture” items are out of the way, here are some of the smaller, day to day items to keep a new baby from breaking the bank:
Vehicles: You do not need a pricey vehicle for “safety” it drives me nuts to hear this. A $15,000 vehicle is generally not much safer than a $1,000 vehicle. Now, you may be able to find a $300 car with the floor boards rusted through, but by and large, you don’t need to upgrade a vehicle because you have a kid, If anything, downgrading may make more sense. Consider getting rid of your expensive, gas guzzling truck for an economical 4 cylinder car or van.
Medical: You don’t have to run the child to the E.R. every time he is sick! Usually you can wait until the next business day and if you can’t get in to your pediatrician, go to the walk in clinic. For a fever, a cool bath, loose clothes, hydration and once they are old enough alternating tylenol and ibuprofen every 3 hours should keep the fever in check, this is what they will tell you at the ER. Monitor it and if it doesn’t seem to get better, then go to the doctor, he may be able to prescribe an antibiotic if needed. Kids get sick. They are little germ factories. They crawl around, touch everything and put everything in their mouths. For a vomiting kid, rest, hydration, and wait 2 hours after the most recent vomiting episode to give them any food or water, then use the BRAT diet (Bread, Rice, Applesauce, and Toast). One of the best tools I purchased for our son was a Pacifier Thermometer
Furniture: I have trouble understanding why people spend so much money on furniture for babies. New parents often buy brand new everything; Cribs, playpens, high chairs, changing tables, walkers, strollers, etc. Most of these can be bought used at a fraction of the cost. A baby shower is of course an excellent way to get some of these items. The only things I recommend buying new are car seats and a Bumbo
Diapers: For my son and for my nephews, I have used the Amazon Mom program, (which you can try for free!).
Clothes: The vast majority of my kids clothes, especially clothes for the ages between 0 and 5 were used. We picked up clothes at thrift stores, garage sales, and even on ebay. On average we paid well under a buck for every piece of clothing. They grow out of clothes so fast and it is easy to find decent condition used clothes. We actually have a tote system, where we have clothes sorted by size and over the years have passed them down through the kids. Some of these clothes have been used by 4 kids since we got them!
Food: I always hear people complain about how expensive baby formula is. The stuff is about $12 a can on average, and our son at his peak consumption went through about 10 cans a month, costing $120. The other option is breast feeding, which has its own set of expenses, but is substantially cheaper. If mom is going back to work this may be next to impossible to pull off. Lower income families can get free formula through the WIC program. At around 6 months we started adding rice cereal to his formula to help him stay full longer, and then slowly started working in real food.
Once the kid gets to the stage of being able to eat foods, parents typically start with the baby food jars that have about an ounce of liquefied fruit or vegetables and costs a dollar each. In retrospect I wish I had tried making our own baby food. This seems like a very cost effective way to go. Once again, we would mix in a bunch of rice cereal with the fruit flavored baby foods to get him some more calories.
Pacifiers: No, don’t save money on these. Buy 5, 10, or even 20 of them and hide them away. Our son was super specific about the kind he would use, so even though driving to the store at 3AM because the evil child lost his binky in a pain, it is SO much worse when they don’t have the kind he needs. Keeping a large stock pile on hand ensures that no matter how good he is at hiding/losing them, you always have some. You actually save money by stocking up on these because you don’t have to run to the store for a binky emergency and you are more likely to get a few hours of sleep to better perform at work.
Toys and Christmas/Birthdays: Kids by nature are not that picky about toys. Yes modern American advertising makes them desire specific toys and pester you relentlessly for them once they can talk, but for the most part, big expensive toys are not necessary. The little ones like things they can drool on. The toddlers like things that make noise and light up. All cheap stuff. Also, there is nothing wrong with used toys. Some of the coolest toys we have picked up were used. The slide to our treehouse and the grave digger power wheels were both used, and far, far, under retail price.
In addition to the fact that they don’t need, or even necessarily want super expensive toys, chances are you are not the only one buying them presents. For years I have fought a losing battle with my wife, because I think we should get them one or two presents max. Why? because they get presents from 4 grandparents, 1 great grandparent, 3 aunts, 1 uncle, and of course Santa.
Back to Work Vs. Stay at Home: So this is the big question many new parents run into, does it make sense to return to work if you have to pay for daycare? Even in the midwest, you can easily pay $200 a week for daycare for 1 kid. For someone working a 40 hour week, this works out to $5/hr, taken from net income.
If the option for the lower earning parent isn’t much above minimum wage, it may make more sense to try to watch someone else’s kid during the week. Give a bit of a discount and take on 2 kids at 40 hours a week and you could generate $15,000 a year. Note: File taxes on this income to ensure you have social security earnings, both for retirement income down the road and for survivor benefits for your spouse and children. Having recorded earnings also allows you to contribute to an IRA if you aren’t married. (Married couples can have one earner fund a non-working spouse’s IRA)
Sometimes, even if the job for the second parent provides little cash flow due to daycare expenses, it keeps him or her in the workforce, helps with keeping skills and networks up to date, and provides an escape from small children.
Taxes: Kids can be great for your taxes. At a minimum you get an extra exemption, which takes $3,950 off your taxable income in 2014. Most families will also get a $1,000 child tax credit, and lower income families may qualify for the earned income credit. There is also a child and dependent care credit which can get you up to a 35% credit on the first $3,000 of yearly expenses for child care per child, this could be another $1,000 tax credit! Look into these deductions and credits and make sure you are taking full advantage of them.
What other advice do you have for new parents? What have you done to save money on kids?
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