New Life, New Expenses
When preparing for the birth of your child, there are a million-and-one things to do and your mind is often racing to prepare yourself mentally, physically, and financially for the arrival of your little bundle of joy. As my wife and I are expecting our first child, I have been thinking about these items a lot lately. Given my financial background, I have been really focusing on those items and how to best prepare for them. Whether it is the upfront cost of diapers, clothes, formula, strollers, car seats, etc. or the more long-term expenses of education, all these things have been floating around in my mind. But let us take a minute to walk through ways to approach these expenses in order to bring more peace to your life.
First these expenses need to be broken up into two categories: day-to-day near-term expenses and future expenses. While it is popular to start looking at the prices for diapers, clothes, formula, etc. for your child before they are born, let’s take a peek at what that actually looks like. When adapting your budget to fit in additional expenses for your little one, you might have to either strip back your monthly savings rate or cut into your discretionary spending each month. For me, I am planning on doing a little bit of both. While even a temporary cut to the savings rate gives me pause, this is only a momentary slow down until I can see the live data and know what the expenses around our child will actually be on a monthly basis. My wife and I will also slightly shave down our discretionary budget for the time being. I do not mean you should take it down to $0 each month or not go out and do fun things, but be more intentional with those dollars. As a parent you will need to be more intentional with your time, so too you should be with each dollar.
Now it is time to look at the future expenses for your little one, particularly college education costs. If you plan to help put them through college this will be one of the largest expenses relating to your child. Depending on what type of college or university your child chooses, these costs could easily be $40,000+ per year! And that is today, let alone after another decade or more of inflation. This is why it is important to begin thinking of these larger costs when your child is young. One great way to begin saving for your child’s education is via your state’s 529 plan. These accounts are essentially tax-advantaged education investment accounts. Here you can invest money for your kid’s education and possibly get tax benefits for doing so. The thought here is that the money will grow over time as it is invested in the stock market quicker than if you leave it in the bank to earn a low single digit interest rate (at best). If you put $100/month into a 529 plan, invested in a moderately aggressive fund, from when your child was born until he/she is 18, you could have up to $40,000 accumulated in that account. That is the beauty of compound interest! As I live in Virginia, here is a link to the Virginia 529 plan. Everyone should check out their 529 plan for their own state.
While preparing for and raising a child is taxing mentally and physically, try to position yourself so it won’t be as financially burdensome. Whether it is re-doing your family budget before your child arrives or setting a target monthly amount to put into their 529 college fund, it is never too early to start thinking about these things. Remember, in these situations time is money, truly, so don’t let your procrastination now dictate your future. Take control of your financial wellbeing for yourself and your child!