This is one of the central questions most new parents, or even new couples, face. For context, there are 89 million search results on Google for this phrase. People are clearly thinking — and then writing — about it.
It’s a little bit different now than it was even 1-2 generations ago. The current savings rate for Americans under 35 is negative (yes, negative) 1.8 percent. You’ve probably seen dozens of articles about how the millennial generation (and even younger Gen X’ers) are waiting longer to have kids and to buy houses. All of this is backed up by trends and research.
The Washington Post did an interesting profile of a millennial couple who was considering having a baby. Here’s their basic situation:
With a combined household income of about $112,000, the Shirinians can pay the bills – but there is not much left over to build savings or to make extra debt payments. Although they don’t need to become completely debt-free before having a child — many parents have a mortgage and student loan debt — they should have extra cash on hand and pay off as much of their credit card debt as possible, the advisers say.
The Post then talks to financial advisors about that context above, and this is one of the conclusions:
The trick for the couple will be to make sure that the money is saved or used to pay down debt and not spent on unnecessary items. (Though if the baby comes before then, the money could help them cover those very necessary costs.) The funds, as they become available, could be split toward their three main goals: paying down mortgage or student loan debt; saving more for retirement; and setting up an emergency fund that could make them feel more secure about starting a family.
This is an important point: throughout history, millions of couples have had babies when they weren’t quite financially ready. But it helps a lot if you have most of your debt paid down, and you’re not putting new incoming money towards unnecessary items.
According to Time Magazine, these are the costs you’re generally looking at when contemplating a bundle of joy:
Considering the average cost for a middle-income couple to raise a child for 18 years comes in at just under a quarter of a million dollars, excluding college costs, according to the U.S. Department of Agriculture, you may never feel like having a baby is in the budget. But keep in mind that four million babies are born in the U.S. each year, and most of their parents adjust just fine to the new costs.
This is the same concept you’ll often hear from the grandparent level of a family: in reality, you’re never ready for your first baby. Even if you had a lot of siblings or nieces/nephews or have seen your neighborhood friends raise toddlers, you have no idea what it’s like for you and your partner until it actually happens. Money is a part of that, of course, but there are many other expectations and things that will happen that you probably weren’t prepared for. That’s not a reason to simply put it off or not do it, though.
U.S. News and World Report has an article about ‘8 Smart Ways To Afford A Baby,’ including this gem:
Make trade-offs. Paul Golden, 34, a spokesman for the National Endowment for Financial Education in Denver and father of two young sons, says that after child-care costs, he and his wife were netting less than $10,000 a year. They decided to reduce their retirement savings and delay putting money away for their kids’ college tuition until their child-care costs go down as their sons get older. Retirement savings have to take priority over college funds because his sons could take out loans for college and pay them back later, Golden explains. “They have a longer time to overcome the burden of savings,” he adds.
There are also dozens of mutual funds and other investment decisions you can make towards your baby’s future, as exemplified in this ad:
One of the guys that helps me with my website is 35; his wife is 34. Those are the same ages as the couple in The Washington Post story above. Around 32 and 31 (him/her), they were discussing having a baby — but lived in New York at the time and figured it would be cost-prohibitive. Now, they live in Texas (a generally cheaper area). He’s freelance and she’s full-time employed, but they still had a bunch of discussions about money. Finally they just decided to forget about money and focus on the idea, because the money situation will never be perfect. Even if you have a trust fund, a baby can feel expensive.
Any tips on the financial side that you guys have seen for pre-baby or baby planning?