If you’ve just had a baby, your life is filled with more joy (but less sleep). You’re probably aware of the time and effort you must invest in raising your child, but you may not have thought about the financial aspect.
The average cost of raising a child to age 17 is $222,360, according to a U.S. Department of Agriculture report on how much middle-income, two-parent families spend on their offspring. And this is the amount before your son or daughter heads to college. Clearly, you need to start making the financial moves necessary to take your child from diapers to a degree.
Here are some suggestions for doing just that:
• Purchase sufficient life insurance. When it was just you and your spouse, it was a good idea for you to have life insurance — but now that you have a child, it’s an absolute necessity. If you have doubts about the value of life insurance, look again at that $222,360 figure, and tack on the costs of four years of college. If you or your spouse died unexpectedly, would the survivor earn enough to raise and educate your child? It’s not likely — so make sure you have adequate life insurance in place.
• Prepare a will. Obviously, you hope to enjoy a long life — one in which you see your child grow to adulthood. However, none of us can predict the future, so you should draw up a will to provide for your child’s financial and physical care. When you create a will, you can name a guardian to step in and care for your child, if necessary, and you can ensure your child receives your financial assets. However, many people go beyond writing a will and establish a living trust, which gives them more control over how and when they want their assets distributed. Your legal adviser can help you prepare a will and determine whether a living trust is appropriate for your needs.
• Maintain adequate cash. To help pay for expenses related to child rearing, keep enough cash on hand. By having enough resources available in liquid accounts, you can avoid having to dip into your long-term investments to pay for short-term needs.
• Save early for college. It’s never too soon to start saving for higher education’s costs. A 529 plan is a tax-advantaged vehicle and may be a great option for college savings. Contributions to a 529 plan are made with after-tax dollars, and can grow tax-free. Withdrawals used for qualified higher education expenses are also tax-free. Furthermore, 529 plan contributions may be eligible for a state tax deduction or credit depending on the plan and state.
• Stay balanced. It takes a lot of money to raise a child. But even as you meet these expenses, think about your own future, particularly your retirement. Strive to strike a balance between the money you spend on your child and the amount you invest in your 401(k), IRA and other retirement-savings vehicles.
You can't put a price on your child's future, but when it comes to caring for that child, you’ll want to know the costs involved — and be prepared for them.
Joe Faulk is a financial adviser.