Jason Close knows a lot about sound money advice. And leading up to the birth of his first child this month, even he's amazed at how much parents can do to prepare.
Close, a 29-year-old financial planner in the Detroit area, is used to dishing out advice for others. And since the birth of his daughter Violet on Sept. 13, he and his wife, Jackie, are finding themselves in the position of planning for one of the most major financial events in many people's lives. One that catches many off guard.
Planning for a child is a financial mind-bender because there are so many unknowns, ranging from the baby's health to future needs and interests that the child might develop later in life. A trip to the emergency room or proclivity of a kid toward an expensive hobby can sink a couple that had been financially independent before having kids.
"There are huge unknowns," Close says. "There are new expenses you can't fully anticipate."
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There's also the sheer magnitude of the cost of raising a child, which is one of the biggest expenses Americans face. It costs the average middle-income family $234,900 to raise a kid from birth to age 18 in current dollars, says the U.S. Department of Agriculture. That's up 23% from what a family spent to raise a kid in 1960, adjusting for inflation.
"If everyone sat down and looked at the costs, the whole species would be extinct in 20 years," says Lynn Ballou, a financial planner in Layfayette, Calif., who raised two adopted children. "And sometimes we don't know what the costs are going to be."
Given the extreme trickiness of financial planning for a new member of a family, parents and financial planners urge couples approaching this stage of their lives to:
One of the first decisions couples must make is how they're going to reconfigure their lives and schedules to accommodate the new arrival. The first big decision to force the issue is whether both parents will return to work or if one will stay home to provide care, says Rita Cheng, a financial adviser based in Bethesda, Md.
Prospective parents should look at their expenses and how much they earn based on one and two incomes, and try to figure out which option makes the most sense, Cheng says. Be careful, though, because parents often overlook hidden costs. For instance, they might think they can keep working their long hours and just pay for day care. But some parents don't realize that most day care centers and schools close earlier than work hours and charge extra for extended-hours care, Cheng says.
And for couples that decide to keep one parent home, remember to factor in the lost contributions to retirement accounts and Social Security as well as changes to insurance coverage, she says. Parents that decide to stay home should also consider costs to get retrained so they can re-enter the workforce, if desired, after the child grows up.
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