Know the predictable costs of raising a child
Denver CPA Craig Arfsten doesn’t give parents a pass on planning.
“In reality, life is pretty darn predictable,” he says. “Raising kids is predictable.”
It’s not hard to reel off a bunch of things you know you’ll have to pay for once you have kids — and Arfsten did just that. Here are approaches to a few big-ticket child-rearing considerations from his list.
Vanguard’s college cost-estimator website projects that four years of in-state tuition and room and board costs at the University of Colorado-Boulder would total $324,452 in 2031 dollars — 18 years from now. If your child went to Stanford University starting in the same year, the site estimates a cost of $673,917. Adams State College comes out to $174,163. These numbers can serve only as a very rough guide, but the takeaway is this: That’s a lot of money and a wide range, and you should have a plan.
How much of your child’s education do you intend to fund? How much will you expect him or her to pay?
One commonly quoted rule of thumb is the “one-third rule.” Under this plan, parents save for a third of the cost of college, plan to pay a third of the cost from current income while their child is in college, and leave one-third to be paid for by the child via their own earnings, loans or scholarships.
You’ll have to find the strategy that best fits your family, and research tools such as 529 plans, which are tax-incentivized savings plans specifically for college educational purposes. Speak with a financial planner and find out which type of 529 fits your strategy.
If you’re considering private schools for K-12, you’ll have to save a lot more, and you’ll want to investigate Coverdell Education Savings Accounts.
Fund extracurricular activities and sports.
Will your child play soccer or some other sport? More than 30 million children and adolescents in the United States do, so the odds are pretty good. Will your child play an instrument or join another club that has fees, dues or travel costs? Again, the odds are good. And that’s a good thing. Physical activity is great and extracurriculars can help with college applications. But it, too, will cost money, and you should plan for that.
Costs could be as low as around $120 for equipment and fees for a 5-year-old in a pretty light soccer program or in the thousands annually for older kids’ competitive sports leagues. (You’re still saving for your own retirement first, right? OK, good — just checking in.)
Provide for needs, like room, board, clothing and health care.
Check out babycenter.com’s Cost of Raising a Child Calculator for help estimating some of these costs. You know what your insurance costs will be, you know what your housing costs will be and whether or not you’ll move to accommodate your growing family — and food and clothing are costs that are under your control.
Planning for the necessities should feel like a relief at this point.
Provide for wants.
Amy Fidelis, financial education director at mpowered, warns that families need to understand the ways that they spend for “wants” — both before and after having kids.
“Are you aware of your current emotional-spending triggers?” she asks. “Because those will be amplified or adjusted when the child arrives.”
For example, if you’re a person who spends a lot on shoes, you just need to be aware of that and think carefully about how you’ll have to adjust your shoe budget — and how you’ll react to the catalogs and targeted Web ads you’re likely to see for infant-sized shoes.
Because of the incredible emotional changes new parents will go through, Fidelis recommends setting up systems like automated bill pay and automated transfers to savings. If the bills are paid automatically soon after payday, there’s less to think about and a little less risk of spending $70 on infant Timberlands that will last about 12 weeks. If you do buy them, you’ve already paid your bills and provided for retirement and other savings — which means you can probably afford them.
Expect the unexpected.
While many costs can be predicted, there will be surprises. But if you’ve saved and maintained an emergency fund, you’ll be able to absorb a lot. Experts recommend saving enough money to cover six to 12 months of your family’s costs and keeping that money in an account separate from your normal checking and savings — a high-yield savings account is a common example.
Keeping the fund at an institution other than your normal bank makes it just a little tougher to withdraw from it on impulse, and could help you maintain a healthy emergency fund. Just remember to set up automatic transfers into it.