Ask Money

Preparing financially for parenthood

Chris Farrell Jul 19, 2010

Question: Hi Chris! My husband and I will be married 4 years in May. In a year or two, we’re thinking of starting a family. We think we’re on track with the basics – emergency fund, retirement saving, investing. Plus, we own a condo which we’d like to start renting out once we move into a new house (which we are saving for in addition to all of the above). But, we don’t know what we should be doing to prepare financially for children! The obvious things are to start saving for private school and college (which we can’t do yet thru 529 plans, etc if we don’t actually have a child, right?), but we’re also not sure if we should be taking any steps to make sure we’re ready for even the extra day to day expenses. There’s also a possibility that my income will decrease if I decide to work part-time. Any ideas of what we can do now to make those early family years easier? Thanks! Elizabeth, Bethesda, MD

Answer: First of all, you’re incredibly well-organized financially and you’re good savers. Your finances will be just fine with the added expense of a child, especially in the early years. Some spending goes up, of course, but you save money elsewhere. For instance, you stop going out a lot, taking in a pub and a movie. Instead, a movie means turning on cable TV and the pub is your refrigerator.

That said, what can you do to prepare? I have two suggestions.

The first is to experiment with living on an income-and-a-half. What financial trade-offs will you face by reducing your income? Where would you maintain your spending, and where would you cut back? Give it a try for a few months and learn from the experience.

However, keep in mind that there are savings from cutting back in your work load that you won’t really be able to enjoy during the “experiment.” For instance, when you actually cut back on your work hours you’ll probably save money from cooking at home more, fewer dry cleaning bills, having the time to actually shop around for deals, and monitor the rental property (assuming you end up renting it out.). Two income couples earn more money but they also tend to spend more because time is such a precious commodity.

My other suggestion is to really examine your house purchase with an eye toward how you plan on raising a family. For instance, I would be wary of taking on too much debt at the same time that you’re having a child. I’d make sure the mortgage and maintenance costs are manageable since you plan on working less. What’s more, do you really intend to send your child to private school? Many people pay a premium (and get their finances stretched) by buying in a neighborhood with good schools. But if you really intend to use private schools you greater freedom of choice of where to live. Run the numbers and see where you come out ahead financially.

Parents today do spend more than the previous generation on their children’s health and education. But if you’re frugal with housing, food, and transportation–three big expenses involving children–you’ll save a lot of money over the years that can then go toward their education and health.

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