In April 2013, my girlfriend and I were walking to our local bagel shop when she asked if I wanted to start a family. I said that I did not -- for all the reasons you'd expect from a 26-year-old male urbanite.
Four months later my girlfriend became my wife, and six months after that our son was born. Best-laid plans and all that.
You're never really financially or emotionally ready for children, and we were no exception. But now that our son is 18 months old and we've found our stride as parents, our minds have started to drift to what life would be like with another tyke.
Many young parents face a similar choice. "The decision to have a child is certainly far too complex to boil down to merely numbers and finances," says Denis Horrigan, partner at Connecticut Wealth Management. "However, it is a good idea to think through these issues so that once the decision is made to expand the family, the parents can have the peace of mind knowing that, at least financially speaking, they know what to expect."
Here are five items to check off.
1. Know Your Budget
"Understanding your budget is probably the best way to gauge whether you are ready for the next child," says Roger Stinnett, managing director of wealth planning at First Foundation Advisors.
Unfortunately two in five families don't budget for one of the biggest expenses associated with raising kids -- child care -- a recent Care.com survey found. In 30 states and the District of Columbia, the average cost of care for an infant in daycare is more than a year’s worth of tuition and fees at a public college in that state, per ChildCare Aware of America, a nonprofit advocacy group.
And that's just the start of it. Even excluding college or pregnancy costs (more on that below), middle-income families who gave birth in 2013 can expect to pay about $250,000 over the first 18 years of the child's life, according to the USDA's Cost of Raising a Child report. That's about $13,000 to $15,000 a year.
The amount my family could expect to spend with another child would increase by about 21% to about $94,500, according to the Family Budget Calculator from the Economic Policy Institute. Of course these results are generalized and certain line items may not apply to you -- you'll spend less on child care, of course, if a family member watches your kids.
And the good news is, some costs won't recur with Kid 2. If your kids are just a few years apart, for instance, you'll probably need a second carseat -- but you can reuse your changing table, stroller and crib.
There are also some financial benefits that come with a second child. For one, you have access to the $1,000 Child Care Tax Credit -- although that begins to be phased out at adjusted gross income of $110,000 for married couples filing jointly. You also pick up another dependent exemption on your tax return, which will save you a little more than $1,100 per kid in the 28% bracket.
But if things still appear tight, "look at other expense items in your budget that you may be able to reduce," says Stinnett. The key is to see if your cash flow will support your newest addition; since my wife and I aren't likely to see an imminent 21% increase in our salaries, we've moved out of our small expensive apartment in the city, significantly pared down our restaurant budget and travel much less often.
2. Adjust Your Employer Benefits
"If you plan to have another child, it is probably best to go with a low-deductible health insurance plan when open enrollment occurs," suggests Jacksonville, Fla., financial planner and M.D. Carolyn McClanahan. "Yes, premiums are higher, but the difference will probably be made up with the cost of delivery and newborn care."
While health plans with a high deductible and a health savings account have gained a broader acceptance over the past decade -- from 4% in 2006 to 20% last year -- they'd leave you on the hook for a larger share of the delivery cost.
You'll also want to make sure that the doctors you want accept your health insurance. If possible, you may also want to try to time your pregnancy so that much of the maternity-related health care -- from prenatal visits to a post-delivery checkup -- occur within the same calendar year. "If pregnancy spreads over two years, you'll have to meet deductibles for both years," says McClanahan.
It's also time to inquire about your company's leave policy. "For those working parents, be sure to check in with your HR department to see what types of benefits the company may offer or may have added since you last checked," says Donna Levin, vice president for Workplace Solutions at Care.com. "Some companies offer on-site daycare or back-up child care that can make budgeting and your life a little easier."
You should also consider buying more term life insurance. "In most situations we recommend a term life insurance policy that coincides with the child [completing] college," says Horrigan.
3. Ramp Up Savings Now
Financial planners suggest an emergency fund in an easy-to-access account of about six months to a year worth of expenses. It's better to err on the side of caution. "Expect the unexpected with children," says Horrigan.
Also consider whether two of the more expensive things you own -- your vehicle and house -- are big enough to fit the new size of your family. "If you have another child, will you consider buying a home with more bedrooms and space for a bigger family? Do you have the down payment saved?" says Stinnett.
4. Fund Another College Account
And you're not done putting money away. The soaring cost of college education can be daunting, but the good news is that you don't have to pay, or save for, the entire cost of your children's education. Instead, try to save about a third of the cost, says Mark Kantrowitz of Edvisors.com. Another third can come from current income at the time, and the last portion from loans.
If you expect to send your child to an in-state public college, you'll need to start putting away $250 a month per child, starting at birth, or $500 for a private school, Kantrowitz says.
Where do you put that cash? Start by checking out your state's 529 plan, so named for the IRS code section that established the savings vehicle. "They offer tax-free growth if the savings are used for qualified college expenses, may provide a state tax deduction for contributions, and don't have to be used at the schools in your home state," says Horrigan. There's a comprehensive view of 529 plans on savingforcollege.com.
5. Don't Forgo Retirement Planning
It's not too early to think about some long-range issues as well. "The practical impact of deciding to expand your family could mean that your retirement date is later than you had been planning," says Horrigan. One more mouth to feed, and one more mind to educate, means that it will be that much harder to fully fund your 401(k) or IRA.
At the most basic, make sure that you can contribute enough to your 401(k) to earn your employer's match, says Stinnett. Don't pass up free money.
Mrs. Tepper and I will surely have a more detailed plan in place when we have our second child. We'll have a better sense of our budget and where we want to live and what we want to drive.
But I admit right now we won't be slaves to the bottom line. After all, Stinnett says, "if we focused too much on that then none of us would have a second child," he says.
While the decision to have another child involves serious financial thought, it's important to remember that financial planning is a path to the kind of life you want to live, with the family you want to have.