Life Events

Once you have a child, financial planning for the future becomes even more essential. How will you finance child care, medical bills, food, education, clothing, toys, and education savings? What will you need to spend money on and how much will each item cost? Here is some of the information you will need.

This Financial Guide provides you with guidelines on handling the expenses a child brings. Obviously, we cannot offer precise costs because the costs hinge on variables such as family size, family income, and geographic location. However, we can suggest some rough (often very rough) estimates for the average sized family of two adults and two children and to at least provide a starting point for your planning. Obviously, the costs for later years will go up as inflation takes its toll.

Knowing what to expect will allow you to plan for the future, thereby increasing your chances that you will not fall short of your financial goals. Indeed, this is the time to review and update if necessary, your financial plan.

Related Guide: Please see the Financial Guide: YOUR FINANCIAL PLAN: Getting Started On A Secure Future.

What Will It Cost You

Here is a breakdown of the items you'll need and an estimate of their cost. The costs are categorized chronologically, according to the child's age.

Note: These estimates are for a first child. Bear in mind that second or third children will cost less than the first since you will already have purchased many of the items you need. If you have three or more children, you will spend about 22 percent less on each child. Also, note that, in the case of a multiple birth, expenses will be higher than (although not double) those of a single birth.

Government estimates say that a middle income family in 2013, defined as having an annual income between $61,530 and $106,540, will spend a total of $245,340 to raise a child to age 17. This figure represents a 1.7 percent increase from 2012 and does not include expenses incurred beyond the age of 18. If you include the cost of college, whether public or private, that cost goes up significantly. And, families that earn more generally can expect to spend more on their children.

Planning Aid: For an estimate of the amount of money you would have at the time your child enters college if you begin saving now, see the Financial Calculator: The College Savings Plan Calculator.

Related Guide: If you are ready to start planning now for your child's future college education-and indeed the time to start is now-please see the Financial Guide: YOUR CHILD'S COLLEGE EDUCATION - How To Finance It.

Birth through Infancy

Here are the costs you can expect up to birth and during the first year:

Note: For a second or third child, you will spend much less on furniture, clothing, and toys, but health care, child care, and food will remain the same.

Hospital Costs

According to the Transforming Maternity Care Partnership, in 2011, an uneventful hospital delivery, on average, in the United States cost between $10,657 (vaginal birth, no complications) and $23,923 (cesarean section birth with complications). The actual costs you pay, of course, vary depending on your health care coverage.

Baby Supplies and Equipment

Before you bring the baby home, you'll buy a crib, a changing table and a swing or bouncy seat. The moderately priced versions of these three things will cost you about $1,200. You'll also need at least one stroller that you can expect to pay about $400 for. A full-size infant car seat will cost you about $150-$200, and a full-size high chair will cost $150. Finally, you will spend several hundred dollars on washcloths, sheets, blankets, towels, undershirts, onesies, and other baby clothes. Also think about whether you plan to use a diaper service, cloth diapers, or use disposable ones.

Feeding and Diapers

The American Academy of Pediatrics recommends exclusively breastfeeding your baby for at least 6 months. Many women, of course, choose to breastfeed longer than that. Nursing mothers will have to invest in several good nursing bras and nursing pads (about $50) as well as a nursing pillow (about $25). If you plan to return to work after 3 months, consider investing in a hospital-grade breast pump, which will run you about $400. In comparison, a year's worth of ready mix powder formula costs about $1,350. If you buy the ready-to-serve type of formula, the cost is even more running well over $2,000. You'll also need a year's supply of bottles, at about $90, and you'll have to add another $40 to replace the nipples at least twice in a year.

When your baby is ready for solid foods, you will also need to account for the cost of rice cereal and baby food.

Diapers are another expense you need to consider. Cloth diapers are the least expensive option. Disposable diaper costs for the first year run about $850, and a diaper genie costs about $40.

Child Care

Child care expenses vary widely. Child care in a day care center costs much less than a live-in nanny (unless you have multiples, then a nanny or au pair is the less expensive option), and prices for day care centers vary widely. Child care in a day care center costs much less than a live-in nanny. A mid-priced day care center charges on average $975 per month for your infant's care, or close to $12,000 per year.

Health Care

Your infant will visit the doctor about six times during his or her first year, including well-baby check-ups as well as the inevitable colds and fevers of infancy. How much you will spend for doctor visits during the first year depends on your health insurance.

Toys and Clothes

You will spend about $500-$600 on toys and clothing during the first year (in addition to what you bought for the layette.)

Total for the First Year

Your total expenses for the first year run about $15,000-$18,000. The biggest variable is the cost of health care.

Ages One through Six

During these years, you'll spend about $1,000 on toys and clothes, and about $2,200 a year on food. If your child attends day care or pre-school, add in the cost of these services. Day care will cost you an average of $12,000 per year, while pre-school costs vary widely. Again, health care costs depend on your health coverage.

Ages Six through Twelve

This is the time when the overall expenses of child-rearing drop and families can save more. During these years, your child care expenses will drop drastically. Health care costs generally stabilize unless of course, your child begins orthodontia during this stage. Then, you'll have to pay more. You are likely to spend more than in the previous stage on clothing, toys, and entertainment, but your kids won't be demanding the high-ticket clothing and other items of adolescence. The bill for food will be just slightly more than what it was in the previous stage. On the negative side, now that your kids are in school, you'll want to pay for all those extras that middle class kids have: dancing and music lessons, sports participation, and so on. And, if you decide to send your kids to private school or to summer camp, these expenses will have to be added in.

Ages Thirteen through Eighteen

During this stage, you can expect your child's food, clothing, and entertainment bill to greatly exceed what it was during the previous stage. For instance, food costs will increase as a result of growth spurts in your adolescent and clothing costs are likely to rise as well as your teen takes more of an interest in his or her appearance.

Once your teen starts driving, your auto insurance will go up. The extra cost could be anywhere from $300 to $1,000, depending on your state of residence and whether your child is a boy or girl. If you intend to buy your child a car, add this expense in as well.

Sweet-16 parties, bar and bat mitzvahs, orthodontia, SAT-preparation courses, music lessons, sports…these are just some of things you might be paying for during those years.

Teaching Your Kids How to Handle Money

The best time to start instilling financial skills and values is when children are young. Start giving your kids an allowance once they reach school age. Let them participate in making the decision of how much their allowance should be.

Some parents may want to require kids to do household chores to earn the allowance. Or, parents might want to provide an allowance, but pay kids extra for the performance of tasks. This incentive plan is, of course, a matter of individual child-rearing philosophy, but it does get the message across that money does not grow on trees.

Give your kids control over their own money (their allowance and whatever monies you give them that are not earmarked for some particular purpose). You can make suggestions to them about what they should do with it-i.e., that they might spend half and save half-but allow them the final say on what happens to the money.

Let them see the consequences of both wise and foolish behavior with regard to money. A child who spends all of his money on the first day of the week is more likely to learn budgeting if he is not provided with extras to tide him over.

How much allowance to provide is a matter of parental discretion. Most parents provide about $7 per week to their elementary school children, and from $12 to $20 a week to kids in junior high.

Savings and Investment

Beyond the basics of budgeting and saving, you will want to get your child involved in saving and investing. The easiest way to do this is to have the child open his or her own passbook savings account.

If you want your child to get familiar with investing, there are various child-friendly mutual funds available. The mailings from the fund can be a source of education. Or you may want to get the child interested in individual stocks.

You may want to start a "matching" program with your kids to encourage saving. For instance, for every dollar that the child puts into a savings account or investment, you might match it with 50 cents.

If you want to get your kids involved with investing, it will usually have to be done through a custodial account. There are generally two types of widely used custodial accounts-one is set up under the Uniform Gifts to Minors Act, and the other under the Uniform Transfers to Minors Act. The type of custodial account available depends on which state you live in.

With a custodial account, the child is the owner, but the custodian (usually a parent) manages the property until the child reaches the age of majority under relevant state law-either 18 or 21. The custodian must follow certain rules concerning management of the property in the account. These rules are intended to ensure that the custodian does what is in the child's best interests.

IRAs for Kids

If your child has earned income-from a paper route or baby-sitting, for example, or from working in the family business he or she can contribute earnings to an IRA. The IRA can be an extremely effective investment for a child because of the IRA's tax-deferral feature and the length of time the money is left in the IRA. If $3,000 per year is contributed to the child's IRA for ten years and the money is left to grow until the child reaches age 65, the amount in the IRA could reach $600,000 or more, depending on the returns on the investment. In 2014, your child can contribute the lesser of his or her earned income for the year or $5,500, either to a traditional IRA or a tax-free Roth IRA. The contribution limits are the same for both types of accounts.

To replace the "lost" earnings, the parents can give $3,000 per year to the child (or the amount of earned income the child has, if less). The child may have to file tax returns.

The drawback of course is that, with some exceptions, the money cannot be withdrawn before age 59-1/2 without tax penalty.

Related Guide: For tax rules on IRA withdrawals for higher education, please see the Financial Guide: HIGHER EDUCATION COSTS: How To Get The Best Tax Treatment.

Taxes and Credit

Kids can learn to use automatic teller machine cards for their savings accounts. They can also start using credit cards at an early age-with parental counsel and involvement. They can learn the concepts of incurring and paying off debts both from credit card use and from small loans that parents make them.

It is important to familiarize kids with paying taxes as well. If children have to file tax returns-as they would with an IRA--allow them to participate in the process; this will get them used to the idea of yearly tax payments, and can also be an opportunity for learning about how governments are run with tax revenues.

Note: One side benefit of getting your kids involved in money management is that it may help to avoid the "math phobia" some kids experience in junior high school.

Tip: Professional guidance should be considered for a life event change as major as a marriage of divorce.

Source: Expenditures on Children By Families 2013, US Department of Agriculture Publication Number 1528-2013. Before-tax Income of $61,530 and $106,540 (Average = $82,790).

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