Elizabeth Renter* says expecting parents need to budget for new expenses, prioritise changing goals and practise living on less.
Photo: Luma Pimentel
Becoming a parent should bring mostly excitement and joy, but a little bit of panic is normal, particularly when you think about the baby budget.
After all, a recent NerdWallet study found that in the first year alone, the cost of raising a baby can run upward of $21,000, and the cost of raising a child to adulthood dwarfs that.
Here is some of what you can expect and how to budget for baby and beyond.
But first, a warning: Becoming a parent will keep your finances in flux for years to come.
You’re in for a challenging ride.
Stay calm.
When it comes to budgeting for parenthood, the keys are equal parts preparedness and flexibility.
Stick to the budgeting basics
Your expenses and income will both likely change when you have a child, but your budgeting approach doesn’t have to.
You’re still stretching your income to cover your expenses and debts, plus savings.
If you’re new to budgeting, we recommend divvying up your income with the 50/30/20 approach:
- 50 per cent for needs such as household bills, minimum loan payments and expenses such as child care, nappies and formula.
- 30 per cent for financial wants.
- 20 per cent for savings and payments on toxic debts, such as payday loans and credit card balances.
This split is a goal.
You could find your needs take up much more than 50 per cent of your income — not uncommon for many middle-income families, particularly those with a child in day care — and that’s OK.
The point is that you’re tracking your spending and aiming for improvement.
Once you’ve established a spending baseline, track your progress from month to month.
Determine your financial priorities
New parents are often in a rush to save for their child’s education, and that’s commendable.
But this shouldn’t come at the cost of your current and future financial security.
After all, you can borrow money for university, but not for retirement.
Once you have a small amount of emergency cash to cover unexpected expenses — say $500 — your financial priorities should be as follows:
Retirement savings: You should ideally set aside 15 per cent of your income, but save at least enough to qualify for the maximum employer match on your superannuation.
Toxic debt payments: Pay off debt that is hurting you.
Balances on payday loans, credit cards and title loans, for example, cost you daily and prevent you from focusing on other financial priorities.
Contributions to an emergency fund: Build your emergency fund from that $500 seed, aiming for enough to replace several months of income.
Once you’re making progress on these items, you can think about university savings strategies.
Practise living on less
Your income will probably change after having a child, even if temporarily.
One parent might take some unpaid maternity or paternity leave, or one might leave work entirely.
Practise living on this lower income in the months leading up to your due date.
Sheri Conklin, a certified financial planner, suggests setting aside the income of the soon-to-be stay-at-home parent to get accustomed to a smaller budget and to save for child care and other upcoming expenses.
Anticipate changing expenses
“You have a lot of expenses associated with becoming a parent, but many of them won’t last forever,” Conklin says.
Formula, nappies and day care are just a few that will fall off your budget as your child grows, and costs like dance lessons and auto insurance will eventually take their place.
In the meantime:
- Estimate the amount you’ll spend in the first year.
- Fine-tune this amount by getting quotes from local child care centres if you plan to put your baby in day care.
Research ways to reduce that cost:
- Buy secondhand.
- Request must-haves at your baby shower(s).
- Shop around for child care.
Anticipate how long these costs will last.
Many costs to first-time parents are one-time expenses, including the cot and the strollers.
Others continue for just a few years, such as child care until your kid goes to school.
Review upcoming expenses monthly when you sit down to pay your bills.
You don’t want to be unprepared, so find space in your budget as best you can in advance.
Prepare for when there just isn’t enough
Sometimes there just isn’t enough money.
Cutting expenses and increasing household income are the two basic strategies for balancing your new budget, but this can be easier said than done.
If you haven’t already, look closely at these options:
- Find new ways to make money.
- Ask for a raise or find a better-paying job.
- Downgrade or sell a car.
- Refinance your mortgage and/or consider refinancing student loans.
- Consolidate and comparison shop for your home and auto insurance.
- Eliminate unnecessary monthly subscriptions, such as streaming services or unused gym memberships.
Like some of the increases in household expenses associated with parenting, these sacrifices can be temporary, too.
* Elizabeth Renter is a personal finance writer for NerdWallet. She tweets at @ElizabethRenter. Her website is elizabeththewriter.com.
This article first appeared at www.nerdwallet.com.
